Month End Update for January 2016.
So one of the worst starts to a year ever from equity markets around the world comes to a close with a sharp rally. This fall seems to have been caused or rationalized post event as being driven by fears of a global slowdown, especially in China and the effects it was having on commodity prices and in particular the oil price. In addition markets had been on a bull run for nearly seven years on the back of Central Bank support and as a result some markets, such as the US, had also got onto extended and historically high ratings.
Thus with the US Federal Reserve starting to tighten monetary policy in December it seems as though investors came into the New Year and suddenly feared that the Fed put may have been withdrawn and so like Wylie Coyote they suddenly looked down and had a panic attack.
Fast forward to the end of the month and we had a sharp rally seemingly on the back of the Japanese central bank introducing negative interest rates and some weak US growth numbers which probably firmed peoples expectations that the US Fed may now be one and done in terms of raising rates, rather than doing a series of rate rises this year, perhaps.
However, it does all beg the question of how dependent markets have become on central bank support as each time they try to start withdrawing it markets seem to have a fit. Thus I guess time will tell if the central banks have now blinked on the back of the markets sliding in January and if therefore this current sell off turns out to be another temporary affair or if it is the harbinger of something worse. Which brings me nicely onto a look at the monthly timing indicators and how the Compound Income Scores Portfolio has done in this difficult month.
Monthly Timing Indicators.
Longer term readers will recall that this is a simple moving average based timing system based on 10 month moving averages, which roughly approximates to the 200 day moving average. Shown above is the history of these type of indicators in the US market and you can click the image to read more about these in the US and for other asset classes around the world that they also track on this basis. While these trailing indicators will not get you out at the top and in at the bottom and can be prone to a whipsaws (as discussed in the chart and associated article above), they can potentially help you to make the most of rising trends and avoid the worst of downturns as shown in the graph above.
Meanwhile in the UK, unsurprisingly after the dreadful start to the year, these are all now in bearish territory below their moving averages by 4% in the case of FTSE Mid 250 and 4.7% in the case of FTSE 100. This continues the trend of the larger market indices being in a bearish trend which has been in place since August last year, although this is the first time since September last year that all including the smaller indices have been bearish. While looking at a price chart of FTSE 100 below:
it seems the trend also turned bearish in the summer when the 50 day cut down through the 200 day in July and the market fell away from the 200 day in August making lower highs since then. Thus if the current month end rally should continue it looks like there could be resistance around the top of the current downtrend at 6200 or so while the falling 200 day is currently just over 6400. So we could still rally another 5% or so without changing the current bearish trend.
Thus in summary the trends in the market and certainly the recent news and market action suggest it is right to remain cautious at the moment even though the market may be trying to rally on signs of renewed central bank help in the short term.
Compound Income Scores Portfolio
Had only its third down month since launch in April 2015 and produced a total return (including dividends) of - 2.4% which again compared favourably with the FTSE All Share which produced -3.1%. So since launch this leaves the portfolio up by 13.2% compared to
-7.4% for the All Share for an outperformance of 20.5% since inception.
During January three stocks actually managed to rise despite the broad based sell off. These were W.H. Smiths (+0.29%)who had a positive year end up date. Character Group (+6.4%) who bounced back a little from a prior sell off on an in line trading statement. Finally 32Red (+27.3%) came up trumps again as it extended its incredible winning streak and proceeded to more than double since it was purchased in October.
Regular readers will know that this prompted me to halve the holding on risk control grounds as it had grown to over 10% of the portfolio. I reinvested the proceeds into XL Media to introduce an extra holding rather than averaging down on lower weighted stocks like Renishaw, Schroders and Utilitywise, although thus far that would have been a better idea!
On the downside the biggest fallers were Paypoint (-16.6%) after another dull update. Sprue Aegis (-15.2%) after their in line trading update and talk of 2nd half weighting may have spooked some investors. While Savills (-13.8%), despite anticipating that underlying results for the year to 31 December 2015 will be ahead of previous expectations, presumably suffered some profit taking on comments about a global slow down which meant they retained their 2016 outlook.
Summary & Conclusion
After a dreadful start to the year and looking at the trends in markets one cannot be anything other than cautious, although a rally at the month end could potentially go a bit further in the short term. So I wouldn't get too bullish just yet and if you feel over exposed or have any lower conviction or geared positions then it might be worth thinking about reducing those into strength just in case this is the start of something worse.
Now I don't say that lightly as we have had a seven year bull market on the back of central bank support in what is shaping up to be a low growth world which continues to labour under a huge mountain of debt. We are literally in uncharted waters and it seems like this could all end badly unless the central banks pull another rabbit out of the hat with negative interest rates and more liquidity injections.
Finally I note that there seems to be a bit of an anti capitalism, big business and wealth disparity bandwagon taking hold - as highlighted by the Google tax row this week - so maybe we could also be at the high water mark for Corporate profits and their share of the cake. This thought is also reinforced by the recent living wage legislation in the UK for example.
Any way that's enough ranting from me as this has already taken me a lot longer than I intended. But if you have got this far and wanted to read more about peak profits there was an interesting piece on this from Research Associates looking back at profits last year in the US and the in longer term in what they describe as the profits bubble, which ties into my comments above.