FTSE 100 Rises. Should We Be Excited?

The changing dynamics of the markets over the past month, where the FTSE 100 has lost as much as 12.5%, the DAX has lost 10.5%, the S+P 500 has lost 7.5% and the Dow Jones has lost 6%, continues to draw huge interest.

Yesterday the FTSE 100 rallied for a second straight day, something that is nothing to shout about apart from the fact that the FTSE has only managed to rally for more than one consecutive day a mere two times in the last month of trading. The market has rallied more than 2% in the last few days. However, having suffered a dramatic 12.5% fall in the space of 1 month (note that a fall of 20% or more means the market is in bear territory), should we be getting excited again by the recent rally? I think more caution is needed over the next week.

Beware the recent rally, for now
June is typically a bearish month. We indicated this in our ‘Another June fall due?’ Infographic which was published at the end of May. We have the end-of-quarter portfolio rebalancing to come and we delve deeper into the summer months with each new trading day, where fund managers and investors spend more time on the beach than at their terminals. This means low volumes and typically choppy and volatile markets which is something to beware of.

We should not forget that the recent bearish moves were not specifically triggered by (the so called game changing) Bernanke’s speech last week, which indicated that the Fed will be moving ahead with a ‘tapering’ plan to reduce quantitative easing later this year. The FTSE and DAX indices had already started to correct at the end of May. What Bernanke’s testimony did was speed the falls and stick a highly visible label on why stocks were falling. Remember, Investors trade on expectations. There had already been expectations in the market for some time that later on this year the Federal Reserve would need to start reducing their aggressive QE programme. Bernanke’s speech gave validity to those concerns.

Over the last 24hrs we have seen Mario Draghi reiterate the European Central Bank will continue to support liquidity, when needed, whilst the People’s Bank of China stands ready to act as the lender of last report to banks in trouble after helping some banks already with liquidity concerns. They will however continue to tighten conditions to bring about a sense of ‘normal progression’. The PBOC comments for me confirm just how serious the situation in China is, rather than reassure that all is OK. The Chinese stock index is now in bear market territory lest we forget.

A fundamental look at the FTSE 100 components shows that only 6 stocks are trading above their 30 day moving average whilst 44 stocks are now trading below their 200 day moving average. The picture was quite the opposite a month ago.

The recent market rally has a whiff of a ‘dead cat bounce’ about it. So whilst the temptation may be to buy the market now at low prices and take advantage of any subsequent price rally that may emerge, this remains a brave and risky strategy. The dynamics of the market are changing from a ‘stimulus on tap’ to a ‘stimulus hand brake’. The more pressure applied to that hand brake, the more abruptly the car stops. But of course this is all about ‘expectations’.