October was indeed a dangerous month!

"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."

A quote from my September catch up last month and October 2018 did indeed prove to be a dangerous month to invest in, although given the volatility it also threw up some opportunities too I guess for nimble traders who had the stomach for it. Talking of traders I think many newer investors who have started out during this prolonged bull market are discovering this year that having highly focussed concentrated portfolios is great when things are going well, but can be very painful when things cut up rough like they did this month. This should be a good learning point for all investors both new and old as you never stop learning in the investing game.

Talking of which as an aside on that subject, I've been reading the latest book from Anthony Bolton, the former Fidelity Special Situation Manager, which I happened across recently on a trip to my local library. Along with many quotes from other famous investors one of his own struck me as being quite relevant to today's markets which he suggests have become more short term due to the growing influence of hedge funds as follows:

"I do think this has increased the opportunities for professional investors prepared to take the one to two year view rather than a time period measured in months or weeks. Often there is so much analysis of the branch or even the leaves on the branch, there are fewer people taking a view on the tree, let alone a view of the forest."

His advice for private investors is to take a three to five year view and not to put money in the stock market if you are likely to need it in the next three years, which to be honest is fairly standard advice. Otherwise it has some useful tips on what it takes to be a fund manger and what you should look for in Companies plus plenty of reminiscing.

Any way back to October and the CIS Portfolio. This fared badly again in October as I suspect many concentrated portfolios will have done. It produced a negative return of 7.87% which was 1.47% behind the 6.4% loss from the FTSE All Share which I use as a benchmark. This leaves it down 3.73% year to date which at least is still 1.86% ahead of or down by less than the -5.59% from the FTSE All Share. I'll not go into details of the individual stocks as for example there were 10 that fell by more than 10% and only two that managed a positive return. If you want to see the  full history of the performance which has taken the portfolio up by 62.46% since inception in March 2015 then please click here to see that or see the table at the end of this piece. If you are interested in learning more about the process used to highlight potential candidates for the portfolio, then please see the Scores link in the menu at the top of the page or in the three bars menu if you are on a hand held device.

So on to this months screening, which I promised to get back to having ducked out of placing trades for the last couple of months. Interestingly a couple of those that I refused to sell last month because they looked oversold actually saw their scores improve sufficiently to stay in the portfolio this month with Alliance Pharma (APH) outperforming substantially & Spectris (SXS) underperforming slightly. The third one though went on to underperform badly and still ranked as a sell this month so out went Forterra (FORT), although I'd still be tempted to run it short term personally as their update seemed fine apart from some unexpected  downtime for one of their kilns and as the budget extended help to buy for first time buyers of new homes. Aside from that two long standing holdings XPP & Zytronic (ZYT) also came up as sells on the scores so out they went, although here personally I'd be more inclined to run with XPP for the long term.

Against this the Portfolio purchased some Page Group (PAGE) which replaced some Hays (HAS) that was sold higher up prior to this sell off, Moneysupermarket (MONY) & Cohort (CHRT) which may also be a beneficiary of the budget with extra spending on defence / cyber security. All these bring something different to the portfolio compared to the existing holdings, although they were not all as over sold as some of the stock they replaced.

Monthly Timing Indicators
Unsurprisingly these all turned negative given the big drop in the market this month with all the indices falling to between 3.9% and 6.5% below their trailing 10 month moving average. You have to go back to March this year and January 2016 for the last time these indicators were this negative. I would not however take this as a signal to sell everything as for one we have seen a decent sell off already and the market has found some support in the short term. In addition the economic statistic that I use in conjunction with these to indicate when you should take them seriously as a recession in the US may be imminent are still not flagging. See this post for the explanation of and rational for this & also see the other links in that piece too.  So in the absence of a US / Global recession, it seems we may be into a more normal 10 to 20% correction or mini bear market for now, rather than a really painful recession induced 40 to 50%+ decline.

So given that and the fact that we have seen a big sell off already plus some support holding recently, as we are coming into a seasonally stronger period and a typically positive phase of the US presidential cycle I would be a bit more optimistic in the short term. In addition with the UK market being unloved and under owned by institutions and is not as stretched in valuation terms as some other markets like the US. I therefore reckon we could see a sharp rally if we get an unexpected BREXIT deal in the next few weeks as the Chancellor seemed to be hinting at in his budget statement and as was suggested in the press over the weekend. The budget also highlighted steady, if low growth expectations, rising real incomes and continued low inflation and interest rates plus tax cuts which all seems quite a supportive background to me.

Having said that though, I was somewhat spooked (given it's been Halloween) or discombobulated (if you prefer fancy English) by a recent piece I read and a chart that it included (which I reproduce below) which included an indicator which suggests a global recession could in the offing and which has a 90%+ hit rate when this indicator has flagged in the past!

So with that in mind I wouldn't get too carried away in any rally that we might see. Especially as we see Central Banks withdrawing liquidity, while valuation are high elsewhere, bond yields rising and economic growth may be slowing. If anything I'd suggest maybe using rallies as opportunities to sell into rather than looking to buy the dips as we have got used to over the last 10 years or so. Though that does depend on your age / stage of life and your resultant time horizon. If you are a younger person with many years to invest then obviously set backs should be welcomed and utilized as long as you are expecting to continue to feeding money into investing over the years.

Nevertheless however old you are and in whatever situation you find yourself in, I'd suggest being careful out there.

Let's Be Careful Out There GIF from Letsbecarefuloutthere GIFs