Crisis What Crisis?

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Markets
So that was the holiday month of August that was and if you have been away you may have come back to see the markets dramatically down and talk of a China crisis or some such. Which put me in mind of the album above and given the weather has been a bit patchy in the UK this summer - the cover could be a postcard from the UK if you had a staycation?

Any way getting back to the financial markets it was certainly a poor one for the UK headline indices such as the FTSE 100 and other mainstream large cap indices as these have heavy weighting in mining and oil shares which were hit particularly hard this month by the slide in commodities and the on going worries about China's growth rate.

Monthly Timing Indicators
Thus on the monthly timing indicators that I follow for UK markets the main indices FTSE 100, 350 and All Share have all slipped below their 10 month simple moving averages by 4 to 5% as a result of this months sell off. Thus this indicator is suggesting you should now be cautious of large cap stocks, although these indicators have done this 4 times in the last 12 months yet the indices remain above where they were a year ago as each time a rally has followed.

So a sign of caution perhaps, but if this proves to be just another one of those short term wobbles then I suspect these indicators will turn positive again if the market rallies further from here again. But with the normally volatile months of September and October still to come I guess it would be sensible to proceed with caution for now.

Having said that though it is noticeable that the Mid Cap and Small Cap indices remain above their 10 month moving averages by around 1.5% and as such would still suggest that they continue in a bull market and that you should remain invested. Again this probably reflects more the fact that there is less concentration / exposure in these areas to mining and oil and more exposure to the domestic economy which still seems to be doing fine. But of course it could be that institutions have just raised cash in the biggest most liquid names and haven't got around to selling mid and small caps yet. So if this does degenerate into a more generalised sell off / mark down then obviously Mid and Small caps would not be immune to that.

Compound Income Scores Portfolio
Which brings me onto a monthly performance update for this. As regular readers may remember this is a mechanical portfolio I set up back in April this year based on picking top scoring stocks from the Compound Income Scores. On the one hand this was to see how a portfolio based on top scoring stocks would fare and also to see how it compared with my own portfolio on the basis that models often outperform humans.

It is pretty heavily over weight in Mid Cap and AIM stocks and as such again benefited from the trends discussed above. Thus in August it saw a total return of -3.08% which compares to the -5.32% total return from the FTSE All Share. This brings a fifth consecutive month of out performance and leaves the portfolio with a total return of 6.34% since inception. This compares to -5.46% from the All Share on the same basis over the same time frame, so not bad but still early days.

Being a mechanical process I'm next due to review it and make changes at the next quarterly review at the end of September when I'm thinking of making a small tweak to the selection criteria which I think should enhance returns.
But in the meantime this months events in markets have brought home to me the attractions of a mechanical screening based selection process which is carried out on an infrequent basis as this forces you to take a detached view, not worry too much about market swings along the way and then deal in a dispassionate way when the time comes to re-screen.

So doing things this way has a lot to recommend it as you can then get on with your life and enjoying yourself and not get too hung up on the day to day minutiae. For me this is becoming apparent at this early stage as the Scores portfolio has also outperformed my own portfolio over this initial period, so food for thought there for me about how I might do things going forward if that trend continues. Cheers - have a great long bank holiday weekend, if you are in England and Wales and if you liked the music at the top of this post - then look out for a Bank Holiday Music Special I am planning as a bit of light relief from markets.