Sentiment is bullish but the FTSE 100 has become overbought on my timing indicators (13-day BTI and Top 20 Differential). A pullback lasting more than one day is expected to relieve the overbought condition. What is not clear is whether this pullback will start now or after the rally to 7240.
In the US the rally is running out of steam, the S&P 500 is struggling to make a new high and the Dow has yet to pass the 20K mark. This does not means there won’t be a final rally to new highs, but if there is a rally it will be relatively safe to go short. US markets need to pullback 2 or 3% before rallying to new highs.
Yesterday’s ADP employment report was disappointing, only 153K new jobs added in December, down sharply from the 215K in November. This report is often seen as a benchmark for the nonfarm payrolls report which is due today at 1.30pm. Analysts expect 178K new jobs, if the ADP employment report is anything to go by, today’s nonfarm payrolls will be disappointing and the market could sell off.
We continue to see a strong FTSE relative to the S&P. I believe the FTSE is supported by mining and oil stocks and expectations the pound will drop further in the weeks ahead. It’s all to do with Brexit, the UK is expected to leave the EU at the end of March but there is no deal with the EU, as long as there is no deal between the UK and the EU the pound will drift lower.
The pound will only rally if an agreement is reached or if the economic data in the UK is strong vs the US / EU data. For example yesterday’s UK services PMI beat forecasts and the pound rallied but what we are seeing now is strong economic data coming from the US and the EU, this does not help the pound.
It seems the period of low growth in the EU is over, manufacturing and services PMIs have been growing strongly in line with the UK data. In this environment I expect the FTSE to make new highs (after a short term pullback). The rally is wave C in five waves [i,ii,iii,iv,v (circle)]. Today the FTSE is expected to trade in the range 7140-7200.
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