We’re seeing uncertain conditions for cyclical stocks in UK markets at the moment. Domestically, such problems are often being blamed on factors such as high housing prices (Help to Buy), Brexit and slowing new car sales.

These factors may be relevant. But as I’ll explain shortly, my Stock in Focus screens suggest that the situation in the UK market is being mirrored in overseas markets. Are we looking at more widespread cyclical weakness?

This week I’ll explain what I plan to do if these conditions persist. I’ll also introduce three new overseas stocks I’ve added to my experimental International SIF fund this month.

Failing momentum?

In the 3+ years I’ve been running the SIF fund, this isn’t the first time that my screen has dried up. Each time this happens, the main reason is that stocks which pass my tests for value and growth fail to meet my requirement for positive momentum.

The main element of this is that the shares must have a one-year relative strength reading that’s greater than zero. What this means in plain English is that they must have outperformed the wider market over the last 12 months.

With my relative strength rule in place, my UK SIF screen offers up just six stocks, none of which are suitable buys for the portfolio. If I disable the RS rule, the total rises to 16.

Although I hope to find some new stocks for my UK SIF fund in the coming weeks, I won’t be abandoning my momentum requirement. I believe it’s an important part of this strategy and I’m happy to allow the portfolio’s cash balance to rise in the absence of suitable stocks to buy.

However, as I mentioned at the top, I think it’s worth noting that this weak momentum doesn’t just seem to be a UK problem. At the time of writing, my international screen returns just 30 stocks from all the global markets covered by Stockopedia. But if I disable the relative strength rule, that total rises to 111.

Clearly we can’t blame Brexit or the outlook for UK car sales for the weak performance of overseas stocks. So is there a wider cyclical risk? Just before writing this I came across some headlines in the automotive trade press which suggests concerns about car sales aren’t restricted to the UK.


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