Mechanical Bull: The Market Dips
In my last post back in September, I mentioned the fact that some commentators were saying that market was due a 10% correction. I argued that a pull-back in stocks seemed unlikely because it is one of the few asset classes left that is able to deliver a real return to investors. Given the market rollercoaster over the last month perhaps I should give up making predictions!
On the other hand I was not entirely wrong. Although there was a whiff of panic in the markets, there was no obvious cause. The papers have been full of headlines on Ebola, but the broader geo-political and economic picture seem relatively unchanged. What's more, the FTSE 100 correction from peak to trough was barely 10% before it staged a 3% recovery last week. I am sure that many sellers have asked themselves what they should do now with their new found cash and decided to buy back in. This market blip seems to be just one of those things that happens from time to time.
With this dip in the market I made the decision to go all in with this year's Stocks and Shares ISA allowance, so I had a busy time this week topping up my portfolio. I am now 80% in equities, which is as far as I want to go until the next lurch downwards.
Portfolio Update
The Mechanical Bull portfolio held up pretty well during this correction (See chart below). Indeed it is already back at the level it was a month ago. Cohort (CHRT) has provided the strongest support for the portfolio over the past month increasing 20% followed by Pace (PIC) which has bounced back 12% following an extended decline.
There was a change in the MB portfolio on 17 October. The MB score for Harvey Nash (LON:HVN) dropped below 80 and so was sold at 88p for a small profit of 3.4%. This was disappointing given that the share price touched 125p in May. It was replaced by Cenkos (LON:CNKS) which was scoring 104. Despite a Momentum score of 96, Cenkos is down 20% over the month.
What Works on Wall Street
I have been reading James O'Shaugnessy's classic, "What Works on Wall St". I am already familiar with his ideas, but this is the first time I've gone directly to the source. In terms of his broad philosophy he is preaching to the converted although there a couple of things that he mentions that have given me pause for thought, particularly around managing risk.
The overarching message of O'Shaugnessy's book is the importance of looking at what works over long time periods (i.e. over 50 years). Its good to be reminded of this when short-term events, like this months market dip consume our attention.
Disclaimer
This is not financial advice. Our content is intended to be used and must be used for information and education purposes only. Please read our disclaimer and terms and conditions to understand our obligations.
6 comments
Nelson - To answer your last question, yes, I would ignore the QV if the Stockrank was over 90. I'm really only applying to those between 80-85 (i.e. just above my sell trigger). I haven't really settled on a level yet, but I consider 61 as "low" while 71 is "not low enough".
Thanks MB. By the way I really like your methods, they appeal to my own views, please keep up the great work. :)
Thanks Purpleski. I should say that I am fairly new to blogging and so I'm not always sure just how best to present my thoughts. I expect that it is a bit a drudge to read through al my previous blog posts as I am mostly writing about what happens to be on my mind at the time. So, it probably doesn't always flow particularly well.
Just to complicate matters, I am not as rigid in my approach as my nome de plume suggests. This is very much a work in progress and there are some tweaks I am making along the way, including some that I may have forgotten to mention.
For example, I started reviewing the MB portfolio monthly at more or less the same day each month and rotating as necessary. However, at some point I slipped into making trades as and when I noticed that my triggers have been hit. I think I started doing this simply because I missed a couple of dates and so it just seemed to easier to do things as I notice them.. However, these kind of changes are pretty immaterial.
I should add that for my real life portfolio I do actually make all my monthly trades just once a month. I use Halifax share dealing which offers £3.95 trades once a month within a two hour window. This saves me at least £50 a month. I also accumulate positions over a number of months (as long as they remain within by buy rules) while keeping an eye on overall size positions. So real life is a bit more complicated, but mostly I use the same buy and sell rules that I describe in my blog.
Anyway, how do I keep track of my MB portfolio? I have things set it up in Stockopedia like this (hope you can read it)
If the sum of the screen count and the Stockrank is greater than 80 then the stock is sold and the proceeds are used to buy the highest scoring stock not already in the portfolio. In this case, the lowest scoring stock is Matchtech (LON:MTECH) wih a score of 83. This is not yet low enough to trigger a sale. However, I also check the current screen for all stocks for automatic buys, that is, stocks scoring 105 or more. As it so happens, Barratt LON:BDEV is currently scoring 105, in which case the lowest scoring stock (i.e. Matchtech) is sold in order to fund that purchase.
Matchtech hasn't done much over the last year, but it has been in the portfolio since May 2013 and had a very good run over the first six months, which means I will bank a 63 per cent profit.
If you have good eyesight you will notice that I also keep track of the QV rank. In my real life portfolio I have started using this as a warning indicator. If the QV score is low, then this implies that a high stock rank is driven by a very high momentum score. I view this divergence as a strong sell signal, Renew (LON:RNWH) falls into this category and since I also hold this in real life, then I will most likely be selling up next month.
Hi MB,
On your last point regarding making use of the QV rank, below what level would you say that the QV rank is deemed to be "low"? Also I notice in your portfolio table that Cohort (LON:CHRT) has a QV of 71 but an overall stock rank of 92, plus RS figures suggesting surging momentum over the last 6 months (greater momentum than £RNWH). Would you ignore the QV rank if say the overall stock rank is still above 90?
Hi MB
I am sorry I only picked up on your reply today 2nd June. Thank you for the reply and I have to disagree about your blogging style. I like it and think it works very well and should be of interest to all intelligent investors!
I will study the blog in more detail next week while on holiday!
Thank you.
Michael
Hi MB
Thanks for the interesting post as ever. I am relatively new to investing so would you mind telling me how do you keep track of your portfolio so that you can tell how it is done month to month?
Thanks.