FTSE:UKX | Market Top - Indicators

4th Oct '16 by Investor & Trader

5 comments 8082 reads

All,

With the FTSE beginning to make new highs, i'm interested in the thoughts of others in regard the market timing and if anyone attempts to predict its overall direction to any degree?

Looking back at the FTSE chart 10 + years its interesting to see the RSI maxing out before a big drop and bottoming out prior to a recovery, there seems to be some correlation in othe cycles too..
Also the overall PE ratio for the ftse currently sat at 19. Is there and data suggesting a turn in the market based on a certain range of PE?

I guess this is just a probing question on how other tend to become cautious or bullish depending on which signals they use.

Cheers....

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Investor & Trader

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Investor, Trader and Financial Educator As a long term investor/trader I have consumed hundreds of financial books and endured countless hours of self education. Hopefully my contribution through my channel will reduce the learning curve duration of many aspiring traders by providing the key information in a concise and enjoyable manner. https://www.youtube.com/channe... more »

5 comments

Investor & Trader

30th Jan '17

Hi all,
Any thought on this, I see the FTSE PE ratio is above 20 and correlation between this and previous downturns etc?

jjis

31st Jan '17

In answer to your question I think you'll find it is very difficult to time the market successfully. However some like Meb Faber & others have come up with methods using moving averages based on total return indices. These can help with timing the market, but can be susceptible to whipsaws (where you have to sell out and buy back in quickly) which we have seen in the UK over the last year or more.

Others suggest that it is time in the market rather than timing the market that is more important. They also suggest and I tend to agree, that big losses (apart from periodic 10 to 20% corrections which can happen) tend to come with recessions. So to extend your time in the market and reduce the risks and costs associated with whipsaws you should combine moving averages with recession indicators such as US unemployment rate and ISM etc. turning up or down.

I have been following these types of indicators for the UK in my blog and the series of posts from the last couple of years. If that is of interest these can be explored in more depth here. For the UK these indicators are all currently still bullish suggesting one should remain invested and a recession does not seem to be on the immediate horizon either.

As for valuations, while high ratings like 20x+ PE are indicators or potentially low future returns, they are not that useful as shorter term market indicators, although as you say RSI etc might be good for this. Hope this helps but do remember that patience and a long term focus are generally recommended and some such as Warren Buffet say you should ignore macro news and market noise and just focus on stocks and their valutaions / prospects, but in any event good luck with your investing.

Jamie

Website: Compoundincome.org

Twitter: @Compoundincome

Investor & Trader

31st Jan '17

Thanks for your thoughts Jamie, much appreciated.

I'll check the link now.

Regards
Gary

andrewdb

31st Jan '17

Just IMO and I am usually wrong but...

I use as a starting point Adj_Value = index x yield x cover x discount_factor

discount factor is based on interest rates and likely growth rates (and is highly subjective).

Personally (again just IMO) there is a 'reversion to mean' effect and when the

Adj_value / Index ratio is seriously different, I know to either the market will correct or I need to correct the disount_factor.

It has worked reasonably well on the big falls (1987, 2000, 2008)

I only track it once a week (currently Adj_value / Index ratio=1.0249 fwiw )

Investor & Trader

31st Jan '17

Thanks Andrew, I'll look at those metric and perhaps correlate with RSI maybe..... food for thought

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