Time to Buy? Plus Cyclical Vs Defensive

Time to Buy?

This week I have seen an interesting development in one of the key indicators that I use that looks at risk levels for the FTSE-100; when I back tested this  using a simple strategy of holding more in equities when the 26 day moving average exceeded the 104 day moving average the results were extremely positive.

Screen Shot 2016-08-23 at 15.22.07

However I have concerns that may make this a special case that means I hang fire in allocating more to equity assets: –

  1. Quantiative Easing has prolonged the bull market creating some readings that are more benign that I would expect
  2. Fundamental analysis continues to suggest overvaluation and weak returns from this point
  3. Short term risk actually remains very high at over 70%
  4. This may be a short lived buy indicator as at the peak of 1999 and 2007

This may definitely be a case to weight and see, my feeling is that there was a short term opportunity in early 2016 (which I took adding some shares such as Atkins and Interserve) but the current high level of the FTSE-100 continues to suggest that significant gains from this point may be limited.

Cyclical Vs Defensive

Heres an interesting graph looking at investor preferences, and how they have been moving more towards Defensive than Cyclical Shares in the UK over the last twelve months…

Def vs cyclical

  • In the US investors have been holding both Cyclical and Defensive with little difference in returns
  • In Europe Investor have preferred Defensives with returns over 10% higher than Cyclicals
  • In the UK this cap is even bigger with Defensives outperforming by a massive 21.42%

Does this means Cyclicals offer value or Investors are wary that shares closely linked to the Economic cycle are at risk with the prospect of a (mild) recession forecast in the UK over the next year or so; for a great article on Cyclical vs Defensive check this out from Soc Gen back in 2013 



Leave a Reply

Your email address will not be published. Required fields are marked *