AIM Just Broke Below Its Moving Averages. Here’s Why That Matters.

Sat 9:06am by Edward Croft

18 comments 1447 reads

If you invest in AIM stocks, you'll have felt the pain already. UK small caps have been hit by the Iran War, and last Monday, the FTSE Aim All Share dropped below both its 120-day and 200-day moving averages.

If your eyes glaze over with technical analysis, I don't blame you. But there's real power in simple indicators. I've been tracking them for years, as they have a remarkable track record for timing.

In October 2023, we noted that AIM was at its most oversold since the global financial crisis. The index was deep below its 120-day moving average and there were no buyers in sight. The market put in a bottom two weeks later. After another couple of months, AIM broke above its moving average and we called the trend change. AIM rallied strongly from those lows.

Now, the same signal that said be brave is saying be careful. So I’ve gone back through 30 years of data to understand whether to pay attention.

AIM - a game of two halves

Back in 1996, the FTSE AIM All Share Index (FTSE:AXX) was priced at 1,017. Today it’s 774. Yes, a buy-and-hold investor in AIM stocks has lost money over 30 years. Dismal AIM indeed.

But behind that grim headline hides something rather remarkable. AIM hasn't just ground lower - it has seen some glorious bull runs countered by equally painful drawdowns. Yes, AIM is full of many poor companies, but it trends. I treat it as the only genuine barometer of private investor animal spirits. Bullish and bearish regimes have unique characteristics - and a simple moving average can tell you which one you are in.

I've tested the 120-day and 200-day moving averages across 30-years of history to paint the full picture.

AIM vs 120-day moving average (MA):

Regime	Days	% of Time	Annualised Return	Volatility
Above MA	3,748	49.9%	+22.7%	11.6%
Below MA	3,762	50.1%	-20.4%	14.7%
Buy & Hold	7,510	100%	-1.2%	13.3%

When AIM is above its 120-day moving average, it returns +22.7% annualised. When it's below - the regime it just entered - it loses -20.4% annualised. That's a 43-percentage-point spread between the two regimes. Andl ook at the volatility difference. Above the moving average, you see higher returns and lower risk - below it, you suffer higher losses and…

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carla77

9:13am

Very good work on AIM stocks Ed no wonder over the past 50 years I have rarely made serious money in them!

colin1862

I've just read an article in the Economist entitled 'Time to buy the most rubbish stocks you can find' based on research by Adam Parker of Trivariate Research. 'Mr Parker has analysed low-quality shares’ historical performance after oil spikes, which he defines as price rises of more than 35% within three months. He found that the trashiest stocks rose by 8% on average in the six months after the spike, compared with 4% for the highest-quality ones'

momemtum trader

9:25am

I think an excellent heads up by Ed echoing previous posts I have made showing a gradual weakening of the highs and lows to favour the lows. I think its also worth pointing out looking at the chart after breaking the 50 MA you have a pattern of lower highs and lower lows, a signal of weakness. Also worth pointing out as aim stocks are smaller caps the spread will tend to be higher which means a larger rise needed to break even and make profits. In a good market AIM stocks can provide terrific positive returns, but in a weak market the falls are also potentially greater

andrewdb

9:37am

Does this pattern apply to AIM stocks of all sizes - there quite a number of stocks over 500m and some that would not be out of place in the FT250

Or put the other way round, does this pattern apply to the FTSE250

Archer

9:41am

Thanks for this analysis it is certainly an interesting one. I have held several AIM shares and have come out mostly frustrated with volatility rather than positive on gains over time and I think your analysis clearly shows that trading is more important than holding in this space. Due to volatility I’m surprised some of the better companies like Jet2 (LON:JET2), Cohort (LON:CHRT) etc have stayed in this exchange.

iwright7

9:56am

If you have full article access to the rubbish stocks article, I would be intereted to know how he defined "rubbish" and "quality" stocks?

Logical David

10:32am

I read at article which stated that the charts are suggesting the best time to buy back into the stock market is around the end May.

Does anybody know if there is any truth in this statement??

John O' Gaunt

10:38am

Excellent.! Many many thanks Ed.

jamesalastair

11:17am

Such a good read. Thank you.

11:20am

The best time time to buy back into the stock market is when uncertainty ends, whenever that may be

zenzini

11:24am

I prefer low prices when there is peak uncertainty

Edward Croft

11:52am

The old adage is "Sell in May and go away, come back on St Leger's day"

That adage ties in with the idea of the best seasonal returns being at the end and start of the year - certainly Santas Rally, January Effect and other anomalies do back this up.

12:21pm

Article short on detail - 'Though today investors differ on exactly which parameters determine a stock’s quality, most agree that they include profits which are high, stable and, preferably, growing. Low debt (relative to profits) also helps.'

That is great provided we knew that was the lowest price and that it wasnt going to go much lower

JASVFS

2:22pm

My thoughts are -- Thank you Ed! I've read enough over the last week by sensible people to have me in selling mode anyway, I've fought against Mr Market too often and lost so I'll raise some more cash and be very patient.

FREng

2:24pm

What if you only held AIM stocks with say SR >80?

Mark Carter

43 mins ago

"The junior AIM Market is at the junkier, low-Quality Rank"

As they say in Glasgow, "You're nae wrang."

Looking at the stats page, the TTM shows PE of 14.8, EPS growth 4.35, div yield 3.33%.

The EPS growth hasn't been bad at all, and remember, that includes the garbage.

Checking the FT250, PE 13.35, EPS growth 5.54%, div yield 3.77%.

The corresponding figures for the FT100 are 13.8, 6.37, 3.64.

The FT100 has been running a bit hot of late, but now the valuations seem reasonable.

One little surprise is that the FT100 has been growing faster than the FT250, which is quite unusual. The mid-caps are offering a greater div yield than the large-caps, something that is also quite strange.

The dividend yield on the AIM is comparable with the mid and large caps. Something that doesn't seem to happen often either.

We live in strange times.

JimMcLad

12 mins ago

I say old chap, we’re not all Rob Roy McGregors don’t you know. (Hancock, the Blood Donor sketch, black and white)

In the old days in Kelvinside (posh area) sex were used to deliver coal.

AIM just broke below its moving averages. Here’s why that matters.

AIM - a game of two halves

AIM vs 120-day moving average (MA):

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Edward Croft

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