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Despite the rampant bullish sentiment over the last year the FTSE 100 is still trading below its high set in May 2013. The failure of the FTSE to follow the S&P 500 to new all-time highs this year and the fact that it still trades over 200 points below the 2013 high could be a prelude to bad news on the horizon for the stock market.
So can we assume the FTSE divergence is anticipating the next move down? Judging from the chart below – we should take heed. If we look at the same set up over the last few months the FTSE behaviour has been a good predictor of future prices.
Each time the S&P goes up faster than the FTSE the stock market pulls back sharply. The blue line on the chart denotes the S&P’s relative strength vs the FTSE’s. Periods of strong S&P outperformance are marked with a red line. During the most recent S&P rally the FTSE has once again failed to keep up, this repetitive lagging nature of the FTSE is therefore a leading indicator. If history is any guide the S&P should pullback in the near term.
If we take a look at three major sectors – banks, oil and mining, together with the FTSE lag we can see why the S&P has the potential to enter a correction going forward. Large global players within these sectors have not been participating in the broader rally. Banks and oil producers are weak while mining stocks, although doing better in recent weeks, have been fragile too, the only reason for this bounce is that investors are betting on hopes of a China stimulus. Bank stocks are down 8% this year, oil stocks are down 2% and mining stocks are up 2%. Without resurgence in these three sectors the FTSE is unlikely to make a new high and the S&P is at risk of a severe correction.
Thierry Laduguie is FTSE 100 Trading Strategist at www.e-yield.com
