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The pullback in the stock market has yet to materialise. The FTSE 100 is resilient because those who believe in the bull market scenario are buying. The longer a bull market goes on the more people will believe in a continuation of the bull market. But with Gold and oil trading at multi-year lows you know something is not right. Mining stock too have been going down for years. Sliding commodity prices are never a good thing, they point to troubles ahead in the stock market. They also point to a weakening economy and a stronger dollar.
In Greece banks re-opened but there is still a restriction on the amount people can withdraw. Our timing indicator, Top 20 Differential is at 1.7%, a move to 2.5% would be overbought. So it looks like the rally has gone too far too fast. I was expecting the Top 20 Differential to reach overbought with the current rally, this has not happened because mining and oil stocks are weak.
Without oil and mining stocks the Differential would probably be overbought which means the FTSE should decline in the short term. But as we have seen recently, the stock market can sometimes produce the unexpected, for example an over extended rally. I know the pullback will come but it is not easy to identify the top. I mentioned the people who believe in the bull market scenario, they have the power to push the index higher and higher. Why? Because each time the stock market corrects they think the rally will resume to new highs so they buy along the way.
The first rally following an oversold condition, which is the current move up, can be powerful. In this case it is difficult to time the end of the rally because if you are a bull and the market has fallen too far you will buy and when the FTSE has already rallied 4 or 5%, you will keep buying as your target is a new high. This is where we are now, the FTSE 100 has rallied by more than 5% yet people keep buying. This is why the FTSE is struggling to pullback. You need to be patient here, there will be an opportunity to buy from lower levels as markets don’t move in a straight line. But don’t expect a new high, when the current rally runs out of steam the next move will be down.
Thierry Laduguie is Trading Strategist at www.bettertrader.co.uk
