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Yesterday was a very quiet day with the FTSE 100 trading in a 30 pts range, the S&P was not moving either. I read that the standard deviation of the S&P 500 from January to April is at its lowest in 20 years. Standard deviation is a measure of volatility, when the index moves sideways volatility is low, that is what we are getting at the moment.
This happens because valuations are too high but investors are not selling because they are hoping for further gains. They are not selling because Trump is now in charge and they know that one of its objectives is to boost the stock market. So the stock market has limited upside and limited downside, which means selling call options with a high strike price is a good strategy. Based on the pattern the stock market will probably be higher in the next month or two but upside is limited. In the near term there is a chance stock markets will pullback, but the pattern on the S&P is not clear, it’s not clear if the S&P will rally or decline in the next few days.
On the data front UK and European manufacturing PMIs continue to improve, as a result GBP/USD surged yesterday. This was meant to weigh on the FTSE but the FTSE was strong and closed higher, the UK index had some catching up to do after the Bank holiday weekend. European and US stocks are moving to record highs while the FTSE is well below its all-time high, an indication the FTSE is underperforming global stock markets. Tonight we have the FOMC statement, I don’t expect any surprise move on interest rates given the recent soft patch of economic data. Watch out for some sharp moves in GBP/USD.
As the S&P is still below 2401 we still don’t know if the next move is up or down. The sideways action of the last few days is an indication the S&P wants to move higher, this is in contrast with the next move is the FTSE. The FTSE appears to be tracing out a downward zigzag [(a),(b),(c)] for wave ii (circle). The decline to 7197 last week was wave (a), the current bounce is wave (b), this bounce may have ended at 7254 as the move is in three waves. If so the next move is down which is wave (c) and it should end below 7197. But this is not high probability based on the impulse wave up in the S&P. If the S&P rallies above 2401, the FTSE won’t decline.
The bad news is, even if the S&P rallies, any move higher will meet stiff resistance in my view. Stock markets have priced in too much good news and with valuations running high, the question is, has the FTSE enough momentum to rally past its all-time high at 7447? A break above that level is possible if we are in wave 5, but I don’t expect a massive rally when the FTSE will be near its all-time high. This means selling call options expiring in July should be a good bet.
Thierry Laduguie is Trading Strategist at www.e-yield.com
