FTSE bulls lacking conviction but remain in control

European stocks started the day modestly higher, before turning flat by midday. Equities have surged higher in recent weeks on hopes central banks’ record low interest rates – combined with the use of unconventional policy tools, such as quantitative easing – will continue to drive yield-seeking investors into the stock markets and provide stimulus for economic growth. This theme will likely remain in place for some time yet, with the ECB yet to start its bond purchasing programme. Admittedly, QE has ended in the US and this may keep the gains on Wall Street in check going forward. But even there, the major indices ended at fresh unchartered territories on Monday as many still expect the pace of the Fed’s tightening cycle to be very slow when it probably starts around the middle of 2015 because inflation is weak. Sentiment is also boosted by evidence the Eurozone economy may be turning the corner. Most of the key macroeconomic pointers released in recent times have matched or beaten expectations, pointing to a more solid first quarter growth in the single currency bloc. Indeed, this morning saw the release of some more positive data from Europe. Retail sales in Germany – the Eurozone’s economic powerhouse – surged by a surprisingly large 2.9% in January, which helped to push the annual rate to 5.3%, the highest level since 2010. In Spain, the number of unemployed people fell by a good 13,500 in February, which confounded expectations of a 10,500 increase. And in the UK, the construction PMI unexpectedly rose 1 whole point last month, to 60.1 from 59.1 in January.

So, the Eurozone is finally showing some solid signs of growth, economic output in the US and UK are both relatively strong, and the major central banks’ policies remain extremely accommodative. Against these backdrops alone, we expect to see further strength in the stock markets. But despite all this, the FTSE 100 continues to underperform its peers. This is mainly because the UK benchmark index is comprised of large commodity stocks which have suffered heavily as metal and, especially, oil prices tumbled in recent months. These stocks are held back further by growing concerns about the health of the Chinese economy where the PBOC, in unexpected moves recently, loosened its policy, most notably at the weekend when it cut the benchmark 1-year lending rate by 25bps to 5.35% and the 1- year deposit rate by 25bps to 2.50%. Although the manufacturing PMI figures were stronger than expected, it is concerns about the health of the housing market that are unnerving some investors. There are also not many technology stocks in the FTSE 100 to provide support the same way they have for some US indices. What’s more, some of the main London-listed banks have underperformed too as they continue to suffer heavily for their role in a foreign exchange rate-rigging scandal and mis-selling of financial products. Indeed, Barclays has announced it will set aside another £750 million for potential foreign exchange fines and litigation. The news has pushed the stock 2.5 per cent in the red today, even though the bank’s annual profits increased by a higher-than-expected 12% (admittedly due to cost-cutting measures).

In the past several days, the FTSE has hit repeated all-time highs. Although that may sound great, it doesn’t really look that good when you see the chart:

As can be seen, each time the index has peeked above the previous record high of 6950, set in 1999, there has been a clear lack of conviction from the bulls to push further higher. The resulting price action has created a pattern that resembles a rising wedge which is bearish. Meanwhile the momentum indicators MACD and RSI are both suggesting that the bullish momentum is fading fast. The apparent lack of interest at this key technical juncture therefore is a concern, although we are still giving the bulls the benefit of the doubt for after all they have successfully taken out the previous key resistance of 6900 – a level which has since turned into support. Thus unless 6900 is taken out on a daily closing basis, we maintain our bullish view on the FTSE. What’s more, the 50 day moving average has now moved above the 200, thereby creating a bullish “golden crossover.” On the upside, the next bullish target could be the psychological 7000 handle, followed by the Fibonacci extension levels around 7130 and 7175.