Timely market timing indicator update.

I have written previously about and kept you updated on a simple monthly market timing indicator. Having updated it at the end of July I thought I would share some of the messages coming out of it. As a quick reminder this looks at current monthly close of the total return index versus its 10 month simple moving average (SMA). If the index is above the SMA then you should be invested because it is still in a rising / bull trend. If it goes below you should sell as the trend is falling or bearish.

Now for the main more broadly based indices like the FTSE 100, FTSE 350 and the FTSE All Share the trends remain positive with the indices closing July at 1.5%,1% and 1% respectively above their trend. So still positive but we will probably need to see a rally soon if the trend is to be maintained. Meanwhile the FTSE 250 which has shown some big falls in recent months has now turned negative ending the month 1.3% below its SMA thus giving a SELL signal. Meanwhile the FTSE Small Cap just hung onto its bull trend by finishing July 0.1% above its SMA. In addition running it after yesterdays falls puts it 1.1% below the MA which if sustained by the end of August would be a sell signal too. 

So as we knew some definite signs of loss of momentum in the Mid and Small Cap segments of the market. Is this a leading indicator of tougher times ahead for the broader market as the smart money exits the less liquid segment of the market first? Some say that the Small Cap index is a purer measure of market sentiment as it is not affected in the same way as FTSE 100 is by futures and hedging activity etc. - food for thought nevertheless. Think I'll be taking a long hard look at my mid and small cap positions on the back of this although it is worth remembering this is a market indicator so you should judge each stock on its own merits, as some stocks can still prosper, but if the trend has turned negative then positive returns will probably be harder to come by across the board. As an investor I will generally stay mostly invested for the long term but look to reduce weaker holdings and hold onto more defensive / quality / income stocks for the long term. 

Finally, I'll leave you with a couple of links. Firstly there was an interesting note and discussion yesterday in the Small Cap Report by Paul Scott at Stockopedia. This touched on some of the movements in smaller stocks and highlighted the even bigger falls from AIM stocks. I think this is open access to all so worth a look if you are not already familiar with it. Finally to an update on the US version of this indicator and the Ivy Portfolio that was suggested on the back of it in the original research paper by Meb Faber (see link at start of this article for more details), from the always useful Doug Short which shows that all the US indices are still above their MA's. This also explains more about the background to this indicator, the research paper and associated book.

Update, although the main US indices are still above their SMA's I did see this post which is suggesting that US Mid and Small Caps may also be breaking down which is suggested could be a precursor of tougher times ahead for the S&P 500. See the graphics below and click it to read more if you are interested.

Click to read more at dshort.com

Click to read more at Kimble Charting Solutions