Does the FTSE 100 tumble present a buying opportunity or is it a falling knife?

Friday, May 11 2012 by
8
Does the FTSE 100 tumble present a buying opportunity or is it a falling knife

dGiven that the FTSE 100 is trading as weakly as we've seen it since last year's trade off, it's a pretty opportune moment to reflect on the first third of the year.   I wrote an article early in January that laid out my own thinking on the state of the market where I had mused on the possibility of a short term relief rally driven several factors - the excessively bearish sentiment at the time,  dovish monetary conditions and technically bullish profit margin signals.  The first 3 months of the year offered up sizeable gains for nimble investors - with at least a 10% rise in the FTSE 100 on top of the gains in December, but the last 6 weeks have given all those gains back.  Pretty frustrating to say the least.  But there were and still are plenty reasons to be more bearish in the medium to long term, and on top of that with macro concerns consistently flaring up and bankers continuing to show their ineptitude the downside heat is growing.  Lets take a look at a few factors.


Technicals


Now I know plenty in the communtiy around Stockopedia who aren't minded to enjoy discussing anything related to technical analysis, but the reality is that momentum works - it's been proven in the lab and in the wild to be a persistent anomaly and made many many hedge funds and traders millions.  Just look to the work of Josef Lakonishok or others for the proof in the pudding.


While most of us can't run sophisticated algorithms, we can 'parse' simple visual cues more easily.  The 200 day MA is probably the best eyeball of market 'trend' that there is, and its displaying a nasty increasingly downward slope.  Worse than that, the FTSE 100 has just cut through the 200 day Moving average on the downside. There are all kinds of strategies that hedge funds play off the back of various moving average timing signals, and this is a classic signal and a portent of  building sell pressure.  On the other hand many use the 200 day MA as a 'support' level and buy aggressively when stocks reach it. Whichever way the market moves from here it's probably going to move quickly.


Profits & Margins


To add to the portent, there was…

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6 Comments on this Article show/hide all

Elias Jones 11th May '12 1 of 6
2

Thanks Ed, an excellent read.
Probably good to have a decent war chest at this stage, as I am sure that some very appealing opportunities may arise based on good firms, growing their revenue and profit. If they can do this during hard times then it will say a lot about their business model and people.

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djpreston 11th May '12 2 of 6
5

A good piece Ed.

As every its a hard one to call when looking at broad indices since, as you know, they have many different parts on very different ratings with very different prospects. Personally id never look at the FTSE as it's simply not very representative of the wider sectors and opportunities.

As you say, contains have (always?) won out. One thing that I can't help but notice is the manic obsession with the "Big, International, Defensive" stocks, a bit "Nifty Fifty" for me. Good businesses they may well be but their pricing is getting quite demanding and had that reason already left the station? Personally id say so. Add in the de-equitisation of pension funds and there is a lot of the market that is simply ignored now. Admittedly there its going to be more volatility in some of these names but there is cracking value to be had for the patient with good potential trading opportunities.

I'm a buyer here, prepared to accept that volatility. Its brave but id reckon on being well ahead of the market over two to three years. If only they could shoot all the politicians, life would be so much more simple and markets could get on with it.

Fund Management: European Wealth
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UK Value Investor 11th May '12 3 of 6
4

Thanks for the mention Ed, glad the graphic could be of some use. I'd say two things about the FTSE 100.

In the shorter term we are bouncing around in a range dominated by short-term technical players, as usual. Just look at a 10 year chart and since mid 2009 we have just been going back and forth between 5,000 and 6,000. I really hate it when the market moves to these obvious round numbers, it makes the whole thing look so stupid.

In the longer term my positive outlook (or more accurately, the data's positive outlook going by CAPE) will be affected by whether or not Montier is right. If he's right and margins take a turn for the worse then profits drop off and CAPE may be flat or even recede over the next few years. That will mean that the forecast returns I have outlined will be too optimistic. But I still think that CAPE (or Tobin's Q or PE30 if you have the data) is the closest thing we have to a crystal ball.

Blog: UK Value Investor
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emptyend 14th May '12 4 of 6
5

This is a stock picker's market and personally I am in no rush - what's your take?

....mmmm it doesn't look to be a "stock picker's market" from where I sit. Not yet anyway. It looks to be a market driven by macro trades by index fund managers and hedge funds. It looks to be a "risk off" market, where the investment game has become one of making daily predictions about press coverage of "the news". I highlight that term, because it isn't the ACTUAL news that matters - it is the press coverage of it ....and the bias that this produces in peoples' impression of the underlying actual news.

Fundamentally this is very unhealthy, especially when one considers that it isn't the views of those who are the most correct thinkers or even the most logical and intelligent thinkers that get the most airtime and press coverage - it is the views of those who shout loudest, have the catchiest soundbites (especially about negative stories) and are the most persistently vocal . This is perpetuating a cycle in which economic confidence simply isn't being allowed to recover! Too many people (especially front-bench Labour politicians) have a vested interest in undermining any semblance of a recovery.

Stock-picking therefore is reduced not to the identification of those companies whose prospects have the best/cheapest fundamentals - it is reduced to trying to guess which companies are best placed to avoid public villification in the media (re compensation, incompetence, exploitation of customers etc etc etc), or finding the few companies that have a compelling M&A proposition for industry buyers who are prepared to look through present turmoil. There aren't many of the latter outside the tech or resources sectors, IMO.

JP Morgan is a case in point - until last week most people would have assumed they were the safest of bank stocks for equity investors - but an unexpected $2bn loss has removed $14bn from their market cap. OTOH, Facebooks $1bn purchase of Instagram or Shell's £1.1bn bid for Cove are good examples of situations that have had real strategic value for the long term.

I don't see any end to this pattern of the market. It obviously WILL end at some point, but predicting when is unusually tricky! I'm inclined to think that the market as a whole may need to get to a bear bottom (c. 4,000) before the market as a whole is worth buying - but in the meantime I'm hoping that I have a slug of one of those with a compelling M&A proposition that will buck what is a very clear trend towards further cheapness across the market.

ee

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Isaac 14th May '12 5 of 6
2

but in the meantime I'm hoping that I have a slug of one of those with a compelling M&A proposition that will buck what is a very clear trend towards further cheapness across the market.

 

I hope so. I would have a lot of respect for Soco management if they pull it off at a decent price £5-6 in the current markets & I could then see myself piling into the market in a BIG DIVERSIFIED way.

Infact, coupled with the buybacks I think it would be the single best way Soco management can offer shareholders to make a large chunk of money in a long time. It beats drilling speculative wells IMO.

With a Soco sale at £5-6 and a 4000 FTSE I thik I could double my money atleast over the next few years with relatively small risk.

ee - Where do you see yourself investing your Soco money?

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emptyend 15th May '12 6 of 6
3

In reply to post #65939

I'll think about it when I've got it. Not before....

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