FTSE 100: the next problem could be rising inflation

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The FTSE 100 is still below its June high at 6512 but the S&P 500 is well above its June high. The S&P 500 has been outperforming the FTSE 100 for months but since the news of a vaccine the FTSE has outperformed the S&P. Many sectors in the FTSE 100 index are undervalued, as a result of the pandemic. These sectors are now rallying and fuelling the rally, the FTSE 100 has some catching up to do.
Despite this I think markets are approaching a top, but not in a straight line. There will be a correction then talks of stimulus will start again and markets will rally. The top could come in December or January. This forecast is based on the position of the 34-day BTI which is a trend reversal indicator and on the position of the Elliott wave. The indicator is at 327, a move above 400 is overbought and in this situation the FTSE 100 is likely to turn down to start a multi-week decline.
A similar move occurred in May when the 34-day BTI rose above 400 and the FTSE 100 peaked three weeks later.
Markets will remain awash with cash to invest, that is the path the central banks want to take. It is not difficult to see it, we are in a major crisis with record unemployment yet property prices are at record highs, stock markets are at new highs or near new highs (except the FTSE), gold and metals are rallying, and bond yields are breaking up.
All this points to rising inflation. It is the rising inflation that could be the next problem, if inflation is too high, central banks will turn off the liquidity tap and the stock market will collapse. When this happens bond yields will fall and gold will soar. We will be in a stagflation scenario which is bullish for gold and bearish for the stock market.
In the short/medium term however both the stock market and gold should rally as central banks continue to stimulate the economy. In terms of Elliott wave pattern the current rally in the FTSE 100 is probably wave C of a fourth wave. This wave C will end in five waves and I think we are in the second wave, the UK index should decline further before the next rally starts. At the end of the fifth wave the 34-day BTI will be above 400. Expect major resistance near 6800.
Thierry Laduguie is Trading Strategist at www.e-yield.com

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