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…
