Be Careful on the FTSE-100

The FTSE has already been lagging most Global equity indices for about a year. Whereas the FTSE 100 is only about 5% higher than its average price [6500] over the last year and yet to break its all-time high [looking at a properly back adjusted chart of the June future we see a high just above 7000 in 1999 [chart 1 below]], many other equity indices- such as the SP500- have seen a bubble like frenzy of buying dragging themselves into euphoric overbought territory and new all-time highs. If this wasn’t bad enough as an indicator of poor relative strength for the FTSE we now see that the Governor of the Bank of England has finally mentioned the “Interest Rates are Going Up” sentence that seriously risks derailing the FTSE-100.

Let’s face it even the most hardened bulls of the latest Global equity market rallies have admitted that Global stocks are in bubble territory based on nothing more than huge amounts of free-money sloshing around the Global system with no other home than the equity market. As Global debt reaches new all-time highs and the real economy worsens the whole foundation of Global equity markets is thin to say the least and in my book it’s a disaster waiting to happen. So called improving economic conditions in the UK are based purely on a huge build-up of personal debt, continued quantitative easing and the hope that the Global financial disaster of 2008 is finally behind us. I believe the disaster of 2008 was a mere warm up for what’s coming as Global Governments and Central Banks have learnt absolutely no lessons from the issues that caused 2008 [i.e. debt and too much cheap money sloshing around the system]. For that reason I would urge extreme caution on the FTSE 100 at current levels.

Chart 1 – No All Time High Yet for the FTSE-100 Future

Chart 2 shows a more focused look at recent price action. What I would say as someone who follows the price more than the fundamentals is that shorting the FTSE at current levels is again a dangerous game but if I were long I would certainly take profits. Shorting here with a stop at 6900 on the June future is a trade I would take however as it offer a sizeable potential gain against a close stop loss.

Chart 2 – Sell FTSE here with a Stop at 6900?

Anyway you cut it after a sustained period of “free money” in the system, the merest hint of a tightening of monetary conditions could see sizeable down moves for Global Equities. Watch this space as they say.

Christopher Clarke

Director, Cambridge Trading Research

Next event – Trading Facts and Fiction / What Works and What Does Not – 21st June 2014