Month End Update & Timing Indicators.

With Halloween having been and gone, the markets turned out not to be so spooky in October after all. Indices around the world regained their poise as the US Federal Reserve back off raising rates for now due to global concerns. Meanwhile in Europe the central bank hinted at more quantitative easing and China also I believe eased monetary restraint somewhat.

This all helped to boost equity markets around the world and this was led by some of the heaviest fallers in the previous correction. Thus although the economic picture has not changed that much many of the more beaten up cyclical and commodity related stocks and sectors like the oils and miners led the recovery.

Consequently in a reversal of the pattern seen in September, FTSE 100 led the way with the previously stronger mid and smaller stocks lagging somewhat, although still finishing in positive territory. Thus total returns on the month ranged between +5.17% for FTSE 100 and +1..65% for the FTSE All Small Ex. Investment Trusts Index.

Monthly Timing Indicators

Regular readers will know that these are based on tracking the total return indices for the headline UK indices against the 10 month simple moving average. Last month all the indices were below their averages suggesting that one should be cautious of the trend. However, as in the past recently when this has occurred this year the market has rallied to challenge this view.

This month's rally has now turned the stronger Mid Cap and Small Cap indices back above their moving averages, but only by 0.4% and 0.9% respectively. So probably not sufficient to suggest a return to bull market conditions just yet, especially as the larger indices like FTSE 100, 350 and Al share all remain below their moving averages by 2% or more.

On the technical front looking at the chart below:

we can see the recovery has taken the FTSE back above its 50 day moving average but it is still some way below the 200 day which suggests a negative trend still. Meanwhile the lows from earlier in the summer between 6400 and 6500 could act as resistance. But simplistically if the market can continue to progress and challenge those level then the downtrend from the April / May peak could be broken or confirmed if the market does turn back down from here.

Now I'm not a technical  analyst so I'll share a view from John Burford at Money Week who also sees it as decision time, although he is looking at it from the lows as in the chart below and the associated article which you can read by clicking the chart.

Click to read Money Week article.

Summary & Conclusion

So not such a scary month after all and in fact we saw a nice recovery, particularly in the more beaten up stocks and sectors which meant the FTSE 100 led the recovery having also led the way down in the sell off. The Mid and smaller cap indices which held up better on the way down also bounced back, but to a lesser degree and as a result are on the verge of re-establishing a more bullish trend.

Time will tell where we go from here, but I'm still hopeful that we might see a traditional year end rally. In any event given what we explored in the Back to the future series of posts and the fact that this seems to suggest UK equities appear to be fairly valued. As a result personally I'll continue to ignore the short term volatility and focus on investing in 
UK listed equities for income which are:

good value, with robust operating characteristics and a yield that is well covered, which has been growing consistently and is forecast to grow in the current year with those forecasts ideally supported by positive estimate revisions.

As income and compounding are two of the main drivers of returns in the long run. With that in mind I'll come back next with a  review on the October performance of the Compound Income Scores portfolio which uses the Compound Income Scores to identify stocks with the above characteristics.

in the meantime I'll leave you with a chart from Advisor Perspectives who follow the timing indicators for US Markets & other asset classes like Global equities ex US, Bonds, Property and Commodities. Of these US equities, Bonds and Property are suggesting being invested given where they are versus their moving averages. While Commodities and Global Equities ex US are below theirs in common with what we have seen with the FTSE. This chart and their update, which you can read by clicking the chart, is useful as it not only gives the background to the theory behind using moving averages as a timing indicator, but also demonstrates the usefulness of them in avoiding big draw downs / bear markets.

In recent years and as we have seen in the UK more recently, they have been more prone to being whipsawed (selling out and buying back in) because the Central Banks keep trying to help everybody out at the first sign of trouble.  So far no signs that the party is over, as the Central banks seem to have been able to keep the plates spinning for now, but it may be worth keeping an eye on these indicators as with rates nailed to the floor, it is not clear what more the central banks can now do in the event of another downturn.

Click to read more at Advisor Perspectives.