FTSE 100 Underperformance is a Bearish Omen

With the ECB interest rate decision and press conference looming, markets are nervous this morning. The FTSE 100 in particular is one of the weakest markets, the UK index broke below yesterday’s low while the S&P 500 is stuck at the top of its trading range. The divergence between the FTSE and the S&P has been growing wider over the last two weeks, the S&P is making new highs, the FTSE is making new lows. Which one of the two indexes is leading the way, the FTSE or the S&P?

If the S&P is the leading index the FTSE will rally to new highs. But chances are, the FTSE is leading the way right now and the S&P will catch up with the FTSE later. This pattern has been a regular feature in the last year, strong rallies not confirmed by the FTSE have been bearish setups.

 

This chart shows the relationship between the S&P 500 and the FTSE 100. The blue line denotes the relative strength of the S&P 500 vs the FTSE 100. Each time the S&P rallies and the FTSE does not follow (rising blue line), the S&P declines. In this situation the FTSE is said to be leading the way.

During the latest rally the blue line started to rise on 15th May and is still rising at a time when the ECB news is priced in and the S&P is at the top of a resistance line. Markets are nervous because the rally has been fuelled by a belief the ECB will announce new measures to fight deflation in Europe. We have some important news at 12:45 (ECB interest rate decision) then 13:30 (ECB press conference). Investors expect some good news from Mario Draghi, and if the ECB acts stock markets could rally strongly, however do I do not expect any significant progress from current levels as many markets are at or approaching key resistance levels. After today’s announcement there is a good chance the S&P will pull back and catch up with the FTSE.

US investors may have bought the rumour, will they sell the fact? UK investors are watching and not participating in the rally, weakness in Europe and emerging markets is the reason why the FTSE 100 next wave down is well underway.

Thierry Laduguie is Trading Strategist at www.bettertrader.co.uk

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