Market Timing Indicators
Given the positive returns from headline UK indices like FTSE in September, these remained positive, although with the Mid 250 & Small Cap indices showing lower returns in September these are now less bullish than the larger / broader indices like FTSE 100 & 350.
Elsewhere all the economic indicators are still in positive / bullish territory with the US Unemployment rate for example hitting a near 50 year low yesterday at 3.7%. Which all suggests that one should continue to remain fully invested.
I note that the US bond market continues to sell off as the economic strength means bond investors are discounting further rises from the Fed ahead in the near term, but at least the yield curve has not inverted yet (see graph at the start) which also still suggests no reason to take evasive action just yet.
I do however stand by the note of caution I struck last month with the snippet about Warren Buffet's cash levels. Indeed despite all the positive economic news out of the US, the markets are starting to feel a bit nervous again as bond yields head upwards and as we head into October which is often a dangerous month to invest. So with that in mind I'll end this section with a link to the latest memo from another famous investor, Howard Marks - who is cautioning about the potential for fall out from bonds and debt this time around.
September proved to be another disappointing month for the CIS Portfolio as it produced another negative return of -0.9%. Unlike August this represented an underperformance of 1.6% versus the FTSE All Share Index, which I use as a benchmark, produced a positive return of 0.7% in September.
The main damage was done by Alliance Pharma (APH) which reported interim results which on the face of it seemed fine if a little dull. They did however include a small write off of £2.5m non-cash impairment charge on its investment in Synthasia International Co., an infant milk formula business in which it has a 20% stake. Consequently reported earnings fell by 35%, but underlying they edged ahead. This write off and consequent fall in the earnings, plus the high valuation they were sitting on, may have prompted some to sell and the price therefore took a hell of a beating and ended the month down by 30.5% - which seems a bit over done to me. Aside from that the other less extreme fallers in September were Zytronic (ZYT) - 9.3% - on no news apart from a long serving non executive leaving. While Avon Rubber (AVON) fell 7.2% as it's in line trading update presumably disappointed some investors who may have been hoping for a better outcome.
On the positive side the main winners were a mixed bag of Ferrexpo (FER) +22.7% on no news as it recovered somewhat from a long losing streak. While Taptica International (TAP) +14.3% & Churchill China (CHH) +14% both responded positively to their results statements reported in the last month.
In this months screening three shares came up as potential sales, although in each case their Scores were only just below the 75 cut off that I use. The three candidates were the aforementioned Alliance Pharma (APH), Forterra (FORT) and Spectris (SXS). In the end I decided to give them all the benefit of the doubt given they were all closed to the threshold and not therefore obvious sales. In addition I felt disinclined to sell APH down here given it looked oversold and was now offering more reasonable value, which in the week since has been vindicated by a small rally in the share price.
Forterra, despite some very modest downgrades, still seems cheap and all the talk is still of trying to build more houses. So one would think that demand for their product should still have solid foundations for now. It was also close to what could be a support level.
Finally Spectris also had very modest downgrades but also seemed to be offering reasonable value, although in the week since then it has come off a bit more. So overall my override of the mechanical sale process has probably just about broken even on a very short term view ex of any trading costs and opportunity cost of not buying potential alternatives.
Any way I'll see how they come out in next month screening & get back with the programme then.
So here we are at the end of May already and somewhat depressingly closing in on the longest day so soon already. Well at least summer has finally arrived in the UK and markets seemed to have had a spring in their step too this month. This mostly seemed to be on the back of an easing in tensions on the Korean Peninsular, some kind of agreement between the US and China on tariffs and continued economic growth. Consequently all the main UK indices saw positive total returns this month with the Fledgling & Mid 250 indices leading the way with total returns of 3.7% & 3.1% respectively. FTSE 100 & the broader All Share both delivered 2.8%, while somewhat surprisingly the Small Cap index brought up the rear with just a 1.5% total return, but this is probably explained by several individual fallers this month with Photo-Me (PHTM) and On The Beach (OTB) being a couple of notable examples.
This brings me onto update you on the UK Market Monthly timing indicators, which at least one person has been kind enough to say they find useful! After the brief sell signal back in February / March as markets corrected these continued to recover further into positive territory again this month given the returns discussed above. Thus the additional focus on combining these with economic indicators has proved it worth again and kept me in the market as it has returned to its recent highs. Not sure how some of those people who were raising serious levels of cash during the weakness have done, who knows maybe they put it all back in at the lows, or perhaps they are now sweating about putting it back to work in addition to sweating due to the hot weather?
Any way talking of sweat or lack of it the laid back CIS Portfolio had a good month and recouped most of the relative losses it suffered in April as it outperformed by 2% with a 4.8% return versus the 2.8% for the All Share discussed earlier. The top and bottom risers and fallers are shown below:
Ticker Name % Price Chg 1m
BMY Bloomsbury Publishing 31.6
GAW Games Workshop 17.2
APH Alliance Pharma 10.6
BOY Bodycote 9.94
IAG International Consolidated Airlines 8.66
Ticker Name % Price Chg 1m
BWY Bellway -0.93
XPP XP Power -2.29
AMO Amino Technologies -3.52
FXPO Ferrexpo -8.97
TAP Taptica International -13.3
As with the timing indicators I've only had one other person kind enough to say they find the portfolio stuff useful & general lack of interest on Twitter so I'll not go into detail on post event rationalisation here or post this on there.
I guess if I can find the time I should write up commentary on news flow and results as they come in, but I've been busy and away quite a bit recently, but again I get the impression that people aren't that interested in that sort of stuff either and it is not a great use of my time when I have other things to be getting on with. Talking of which I'm off now to do the monthly re-screening of the portfolio and I'll try and put the results of that on the site next week - so if that is of any interest then do check back here next week.
April saw a bounce back from the weakness seen in equity markets in Q1 2018, with FTSE 100 for once leading the way with a 6.84% total return. This plus lesser positive returns from the smaller indices was sufficient to turn the market timing indicators positive again for all the indices that I follow this for in the UK. This leaves them all some 2 to 3% above their trailing 10 month simple average and as such they are giving a buy signal again.
Regular readers will however know that I do not follow the buy and sell signals from these religiously as they tend to be volatile and can sometimes lead you to be selling and buying in quick succession as they flip and flop, as they have done recently, when you get a periodic shake-out in the market. As mentioned here regularly and originally when I looked at some research based on this, these indicators are improved and therefore best used in conjunction with economic indicators that tend to signal a downturn in the US economy and this tends to keep one invested for much longer to benefit from positive trends and compounding. Now strangely the best of these was seen to be the US Unemployment rate, which is currently close to record lows, despite this generally being perceived as a lagging indicator. In addition to this I am also monitoring ISM indices which measure business confidence in the manufacturing and service sectors and can also be a leading indicator of business downturns.
The other thing I have added more recently to the list of things I am monitoring is the the shape of the US yield curve ( a graph of the yield on US Treasuries from 2 to 30 years) with a particular focus on the spread between the 2 year and the 10 year bonds. I've done this as these yields have been in the news recently as the Fed has started to tighten and indicated up to 3 more rate increases this year. This has led to the ten year yield popping above 3% recently which provides a bit more competition for equities. The thing to watch out for is if the yield curve inverts (the shorter term 2 year yield exceeding the 10 year yield) as this has also been an advanced warning of around 9 to 18 months of trouble ahead in the US economy. I know this sound esoteric but I picked this up years ago (hat tip to John Mauldin) and you can read some recent academic research about this in the file attached at the end of this post.
Meanwhile in the Compound Income Scores Portfolio (CISP) there was also a recovery but to a lesser extent than the FTSE All Share given it bias towards Mid and Smaller Cap stocks. Thus year to date the performance is nothing to write home about being roughly flat against the index, so I won't write about it this month after last months bumper third anniversary update. If you are interested in checking out the numbers etc. you can find them elsewhere on the site here under the portfolio heading or the link above. Meanwhile I'll try and raise the enthusiasm to do another post next week with an update on any trades coming out of this month re-screening as it looks like there are at least 2 or 3 potential sales.
Cheers for now and here's to hoping that now we are in May that the weather here in the UK might also follow the markets lead and pick up too. Lets hope that the market recovery in April, like the brief spell of warmer weather, wasn't a false dawn too!
...well it feels like mid winter what with all the snow and cold weather recently and the chill blowing through the stock market this year too. Thus although it still feels like mid winter outside here in the UK, we are already at the end of the first quarter. Thus we have the March update for the Monthly timing indicators which have also cooled decidedly recently too.
Now after this months further decline in markets I can report that all the UK indices are now negative and trading some 2 to 3% below their respective moving averages. So these suggest that a cautious approach is still warranted, but the economic indicators still do not suggest a recession is on the immediate horizon, so to avoid being whipsawed I would suggest continuing to ignore these signals for now. But I will be keeping a close eye on the stats and bond yields, inflation etc. for signs of trouble ahead. Having said that though I note that the FTSE chart has made a death cross this month (when a short term moving average cuts down through a longer term one) which is a negative signal as far as chartist are concerned - so perhaps I should not be too complacent, especially with the Nifty four Fang stocks losing their bite recently & the threat of a Trump trade war rising.
Any way as for the Compound Income Scores portfolio (CISP) the performance here in March also cooled as it ended the month down by 2.2% in total return terms, although this did compare favourably with the FTSE All Share which was down by 2.8% on the same basis. This leaves the CISP down by 5.15% year to date which means it has lost value more slowly than the FTSE All Share this year which is down by 7.14%. Since inception in April 2015 the CISP has produced a total return of 60% compared to 17.2% from the FTSE All Share and has outperformed in 26 out of 36 months or roughly 72% of the time which is not a bad strike rate.
I'll try and do a more in depth review of the performance and some commentary on the stocks and any changes from this months screening on Easter Monday and I hope to be able to make an offer for readers to try the Scores for free, so if you are bored this weekend don't forget to check back then.
As I'm sure you are aware by now February was a poor month for stock markets and the UK was no different. The larger indices led the way down with the FTSE 100 producing a -2.55% total return. Mid and Small Cap stocks held up slightly better this month again but they also produced negative returns, so there was no place to hide from the down draught. This has brought the main larger and broader indices such as FTSE 100, 350 and All Share below their simple 10 month moving averages by 0.8%., 0.7% & 0.6% respectively. While the Small Cap and Mid Cap indices, having held up slightly better in the sell off remain just above their moving averages by 1% and 0.1% respectively for now.
Thus a mixed picture on these indicators which ordinarily would suggest a note of caution towards the market in the main and could suggest the start of a more bearish trend generally. As discussed here before however, these type of indicators can be vulnerable to whipsawing - where they force you to sell out and then buy back in higher up when they then subsequently turn positive again. Thus I tend to use these as a guide to overall market mood, but I am not following the signals in the short term unless they are confirmed by economic indicators like economic growth generally and in particular the US Unemployment rate, ISM indices and the shape of the yield curve.
Since these other indicators are all currently in positive territory I'm not inclined to take action based on the market timing indicators other than thinking that it might represent a buying opportunity in the short term - perhaps. Having said that though it is worth bearing in mind that the general consensus is that we have entered the late stage of this particular cycle. Now while last year was unusually calm and profitable making many novice investors think that this game is easy and that they investment gods, I suspect this year will be much more testing. Indeed the late stage of the stock market cycle is typified by increased volatility and the market has certainly been taking no prisoners on the hint of any disappointment so far this year.
Now that's not to say that the market can't go higher from here if the earnings and dividend growth that is expected is delivered. It is just that progress from here is likely to be much less serene and will probably be more a case of two steps forward and one step back. We will however of course have to keep an eye on how "events" pan out and see if all the concerns about rising inflation, interest rates, wages, trade tariffs, BREXIT etc. etc. finally prove sufficient to derail economies and stock markets. So given the icy weather and the cooler tone in the market wrap up warm and be careful out there as sliding down hill on snow and in the markets can be painful.