I'm always on the lookout for turning points in the market, even though I know it's tricky, and most people get it wrong - therefore should not try (me included). However, I've been lucky enough to duck some of the biggest drops in the last 18 years by reducing shares held when it looks like there are storms ahead. So I can't help but consider where we are at the moment.
The sustained drop in the US indices last week (particularly on Friday) made me wonder whether a bigg'ish drop might happen in the UK fairly shortly i.e. starting on Monday morning. Clearly, the UK markets will have some catching up to do with the US - so we should expect the FTSE indices to open lower first thing. But is it likely that they will continue falling for several days?
My instinct is that it's more likely than not. However having spent the afternoon looking over historical charts and data I don't think it's a foregone conclusion. Thoughts surrounding the possibility of a drop:
1. The US markets have had a fantastic run for various reasons and they look pretty toppy - so a fall there looks possible. But reviewing the long term FTSE 100 it doesn't look stretched at all.
2. The broad UK markets haven't been dragged up by the strong bull rally in the US. A big drop in the US won't necessarily mean a big fall here. We didn't follow them up so maybe we won't follow them down? I realise that this cuts against the usual accepted mantra of the US sneezing and the UK catching a cold. But maybe the UK has got so many unusual ongoing political/economic issues that the correlation between our stock markets isn't as strong as usual.
3. The stock market tends to dislike rising interest rates - and one would think that our rates being on an upward trend would make a fall more likely. But the actual level of interest rates is very low. And after reviewing the charts on interest rates against the level of the markets, it appears that in the recent past (the last 50 years or so) rising interest rates only have an affect on the market when they get to about 4%. Maybe not so far off in the US but…
Unless there is a significant change of heart overnight, it’s likely that FTSE 100 will open tomorrow down about another 63 points from Friday’s London close at about 7380 (according to IG). Most of this seems to represent a catch up on the last few hours trading in the US when the market dropped quite sharply not necessarily a further deterioration in sentiment over the weekend. Likewise any sell off in Asia overnight might grab the headlines but is also keeping step with the US fall. I’m not sure we’ll get a full read on the state of the market direction until the US opens in the afternoon. Another sharp fall there will, IMO, knock on to the rest of markets.
Gus.
