UK Market Timing Indicators.

1/3/2016

With it being March already it is time to look at the simple monthly timing indicators for the UK market that I mentioned yesterday. These are based on looking at UK Equity total return indices against their simple 10 month moving averages. Well somewhat surprisingly we saw positive total returns in February, yes positive returns, although it doesn't feel like that given the rough ride we had. Despite this all the larger indices such as FTSE 100, FTSE 350 and All Share remain below their respective moving averages by 2.9%. While in a reversal of fortunes the Small Cap index is 3.6% below its average as smaller companies lagged the broader recovery in larger and mid cap stocks.

Thus, despite the recovery in the market in the second half of February, these indicators still suggest a note of caution about the trend going forward from here. Looking at the actual price index of FTSE though this is now challenging the 6100 resistance level that is apparent on the chart from the recent downtrend channel. Beyond that according to Justin at Share pickers, (who I did another podcast - number 420 with last week), 6200 is the next resistance level to watch out for, so probably still too early to say we are out of the woods just yet, especially with the Brexit debate going on in the background.

Having said that though I did post some thoughts recently about whether this was just a normal correction in a bull market or the start of a more serious bear market. In that I suggested that in the absence of a recession in the short term, I was more inclined to view it as a correction. Now the interesting research that I mentioned yesterday that I came across in relation to this is from a website called Philosophical Economics.

In two recent posts the first titled Growth and Trend: A Simple, Powerful Technique for Timing the Stock Market and an earlier incredibly detailed post titled In Search of the Perfect Recession Indicator the author looked at combining growth / recession indicators with the moving average based indicator on the stock market. The bottom line was doing this to ignore the timing indicator when the economic trends were still positive, tended to improve the performance of the timing indicator by avoiding the periodic whipsaws and keeping you long or invested for more of the time.

Somewhat surprisingly, given that employment data is generally seen as something of a lagging indicator, tracking the 12 month moving average against the actual unemployment rate apparently turned out to be the best recession indicator for this purpose. So I had a look at this for the UK but it didn't seem to map that well to market turning points. But then re-reading the recession indicator post the conclusion the author had this to say which ties in with the old adage of if the US sneezes then we catch a cold:

"If we use U.S. economic data as a filter to time foreign securities, the performance turns out to be excellent. But if we use economic data from the foreign countries themselves, then the strategy ends up underperforming a simple unfiltered trend-following strategy. Among other things, this tells us something that we could probably have already deduced from observation: the health of our economy and our equity markets is more relevant to the performance of foreign equity markets than the health of their own economies. This is especially true with respect to large downward moves–the well-known global “crises” that drag all markets down in unison, and that make trend-following a historically profitable strategy."

Thus I think I will start watching US employment data more closely - I guess that's why markets make such a big thing of US non-farm payrolls every month.

Finally, I note that the latest Credit Suisse Global Investment Returns Year Book 2016 is out and I attach a copy for you below as I'm kind like that. This is a good read as usual and takes a look at the effects of interest rate cycles on asset classes given the recent US Rate rise. It also looks at recoveries from past crises and compares it to today and concludes that equities rather than bonds are probably the place to be for decent real returns a view I would tend to agree with.