Market Timing Update - the AIM index has signalled a new uptrend
On October 10th, I flagged that the AIM market was at its most oversold since the global financial crisis.
That counter trend signal was prescient, but proved to be 2 weeks early. The market bottomed on the 26th October. Since then, we’ve had a strong 8% rally.
Today, AIM has now signalled a confirmation of change in trend. It has broken above its 120-day moving average. This is a timing signal I’ve been waiting for all year after a failed breakout in January.
Why the focus on AIM?
AIM has been a pretty dismal market for returns. In fact, since 1996 the index has gone backwards. It’s full of many early-stage, pre-profitability companies, best backed by venture investors. It’s a massive bugbear of mine that so many speculative, lottery style AIM stocks suck in unwary private investors.
Nonetheless, I love AIM as a timing signal and as a hunting ground for under the radar quality small caps. While AIM as a whole ends up going nowhere, it does trend beautifully both up and down. It’s like a barometer of animal spirits, identifying when we’ve lost our minds in both directions, and when the change in sentiment may be upon us.
With both a significant counter-trend signal on October 10th, and today’s change in trend confirmation correlating with the Fed’s dovishness, the risks to the downside seem diminished.
The AIM Trend Signal
The simplest way of trend-following is to buy when an instrument is above its moving average price and sell when below. Traders and investors use different look back periods to define their moving averages, but in my studies, I’ve found that the 120-day moving average gives the optimal signal for the AIM Market.
In fact, since 1996, if you bought the AIM All Share index when it’s above its 120-day MA, and sold when below you’d have made a 50x return. That’s more than 16% annualised, even though half the time you’re in cash. Sadly, the AIM All Share is not investable as there are no ETFs or index funds based upon it and the model doesn’t include transaction costs - but you can use it as a confirmatory signal for when to own small caps.
With AIM so terribly oversold, interest rates seemingly having peaked, and a wall of money sitting on the sidelines in interest-bearing instruments, the tide looks to be finally turning.
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18 comments
Great Stuff Ed, thank you. Now that we have a monthly candle closing above your 120 Day SMA, and confirmation of the validity of Novembers bullish piercing candle. It looks as we may have an opportunity to get back into AIM Shares. Only reservation is the extremely overbought conditions in the US, however that’s another topic. I’ve put together a small screen of possible AIM shares. The purpose of the screen was to highlight shares that may move in tandem with the index only (Nothing else initially). Throws up a few interesting names never the less. Maybe the community could add their Aim recommendations or suggestions into the mix and continue this thread as an (AIM only) discussion group going forward until the next 120 day Moving Average sell signal materialises!
Yes Ed I have been watching AIM like a hawke since I switch some of my portfolio out of it a put the funds into a few FTSE Coys . Let’s see what happens over the next 3 months, May revert the funds back from whence they came!
VCTs are dividend and CGT tax free. If you buy new ones, they are also eligible for 30% income tax relief.
Is there a minimum holding period for VCTs to qualify for these benefits?
Thanks Ed. Is there a list of funds which invest mainly in AIM companies? I suspect there's a lot of beaten down small cap funds currently. tia
Check out the AIC website: https://www.theaic.co.uk/aic/f...
Another way into an AIM fund would be via an AIM VCT suc as Hargreave Hale Aim Vct (LON:HHV) (I hold) or Octopus AIM VCT (LON:OOA) . These are quite expensive in terms of annual management charge but dividends are tax free.
Or Unicorn AIM VCT? - been around for a good few years. Some unquoted stocks in addition to AIM.
I started this journey when covid hit and I was furloughed for a seven weeks (was not in public service at that time) and what to to do - make a fortune on the stockmarket - lol. As a newby I looked at my Dad/Grandparents holdings (sold on probate) - Shell, BAE, and some that are no longer around. I instantly went to BAE but was into trading at that time so bought, fell, sold at loss and moved on. But if had thrown the whole hand into said BAE Systems (LON:BA.) I could have doubled my money.
But to start back into AIM, even SCVR will be a struggle for me for a long time. And I'm sure many others have similar sentiment. As for ETF's etc have no interest whatsoever - where's the fun in others picking your losers - lol.
I think this is the best thing you can do with your money - break even then ok. Gardening, golf, boats, ferraris etc - well want to lose money there are many options. This is fluid stressful and a mental drug - which like Mr Munger will hopefully keep you from Deaths scythe for a few years more than his hourglass anticipated (Pratchett). God rest Mr Munger.
Looking forward to Christmas - so can review my holdings, catch up on Shares magazine, endless notes and what to invest in 2024 - sad really.
My picks (all negs I'm afraid) - defence, uranium, commodities, old age healthcare (but the 'herd' is already on point so no advantage).
The only hope for small caps is someone buys them out - Paul has highlighted this often - but maybe not clothes or cars (apologies). Scrap merchants for young cars is a thought.
Good to have fun but don't put it all on one horse...that way disaster beckons.
" Sadly, the AIM All Share is not investable as there are no ETFs or index funds based upon it"
Would iShares MSCI UK Small Cap UCITS ETF GBP (Acc) (LON:CUKS) fit the bill?
MSCI clearly have a different definition of small cap to us as it includes companies like B&M European Value Retail SA (LON:BME) , Marks and Spencer (LON:MKS) , Rightmove (LON:RMV) , and Games Workshop (LON:GAW)
Probably are compared to US stocks.
Although not an ETF I think the IFSL Marlborough Nano Cap Growth fund is pretty close, invested in circa 160 companies of which most are AIM. Until the begining of 2022 it was doing exceptionally well and so am hopeful of a big upside swing. It forms a bit of a amall cap tilt in my SIPP portfolio.
I hope so too, my retirement is of many thanks to Marlborough Funds in particular the Microcap Growth Fund and yes in the later years to the Nanocap Fund and a hat tip to Giles Hargreave who managed those funds. He however has moved on albeit I believe remains as an adviser and the fund(s) haven't done as well since he did in my opinion, the jury is still out on his successors but I hope they have learned and gained experience from his guidance. I've continued to hold the Nanocap as it was as it was a smaller position but I now only hold a similar amount in Microcap growth. I may add if they can prove themselves as good as Giles
By my calculations (fag packet admittedly) I'm anticipating / hoping (!) the AIM will rise by c40% over the next 2 years (50% from October 23 lows).
At peak Stockmarket animal spirits / TINA (there is no alternative), 0% interest rates etc in September 21 it peaked at over 1300.
At peak gloom, 5.25% interest rates (TIA - there is an alternative), high inflation forever talk, peak SCVR comments of switching to cash etc in October 23 it bottomed at over 50% lower around 675.
On the assumption that interest rates will reduce from the current 5.25% to around 2.5-3% in c2 years time as inflation lowers then the AIM should in theory reach c1000 as the wall of money returns to the market.
Obviously these predictions would need to be revised if a significant black swan event occurred eg China invading Taiwan or the UK has a further 4 prime ministers in the next 5 years for instance!
What's your prediction for the AIM in 2 years?
Thanks Ed, very interesting. I’ve been building a position in FTSE 250 ETFs. It’s stuffed full of asset rich discounted REiTs, cheap financials (some ludicrously so) and a few good growers. Meanwhile it’s on a 4%+ yield with 11% eps growth forecast. With growing confidence that peak rates are in I struggle to see much downside risk, and wouldn’t be surprised to see 25,000 for the index next year. Shall we say 24k for 2024 - has a better ring to it
"Shall we say 24k for 2024 - has a better ring to it?"
I think 25 by 25 sounds catchy.