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23rd January- Ignore the short term wobbles, FTSE has huge potential

23 January 2017

TECHNICALS:

Monthly  futures continuation chart

The market has broken up above the Prior Highs of 1999, 2007 and 2015. if the market can sustain this move at by  closing above, say, 7085 at the end of January, the band of closes will become support on any subsequent pull backs.

The creation such a solid underpinning and the likely ratchet effect on the market that will begin the FTSE's next bull leg is probably the most important single chart event to happen in the last 20 years.

WEEKLY OIL  FUTURES CONTINUATION CHART

The band of support created from  three Prior Highs beneath the market can be seen in greater details now.

But note too, the clear Head and Shoulder Reversal pattern that completed in July this year.

The minimum move implied by that pattern, discovered by projecting the depth of the 'Head' above the Neckline is around 7400.

For chartist this pattern was the catalyst for the break up through 7000.

And the market has further to go before the bull influence of that pattern  begins to diminish, around 7400.

FUNDAMENTALS:

The UK economy has remained resilient, even strong, in the post BREXIT vote period despite predictions from mainstream economists, the Government and the Bank of England.

A strong economy would generally equate to a well-supported currency and a solid stock market so  in normal times there would be no surprise that the FTSE has in recent weeks and months made several new highs.

But the UK has voted to leave the EU, the Pound has taken a hammering .

One might argue that the uncertainty being generated by not knowing what deal the UK will get when it finally departs should be enough to hit growth and undermine not only the Pound, but the FTSE 100 too?

Yet for the moment UK manufacturers are enjoying the benefit of a Sterling devaluation. The PMI Manufacturing survey has over recent months continued to indicate strong growth and recent industrial production and manufacturing output reports are also recording solid to strong growth.

Of course manufacturing accounts for around only 15% of GDP, so of itself is insufficient to keep the economy on its current growth path. The key to the continued strong performance has been the resilience of the consumer. Consumer spending/demand has out paced virtually all forecasts and remained strong. Unemployment has remained at very low levels and the housing market continues to see price inflation when the opposite was expected by the mainstream.

All this is good news for stocks. But the FTSE 100 isn’t just a domestic market. Due to the status of London as a pre-eminent financial centre, many foreign companies have chosen to list on the London stock exchange.

Since those foreign companies report in a currency other than Sterling, even though their listing on the FTSE 100 would be in Sterling, the value of those foreign companies is inflated by the weakness of the Pound, to the extent that their capital value, income and dividends all benefit from the current bout of Sterling weakness.

Has the rally in the FTSE exhausted? We don’t think so.

In the current environment, the UK economy looks set to maintain current growth levels throughout this year and although forecasters are predicting a slowdown in 2018 as the exit date looms larger, we are not convinced; they have already been proved wrong.

However, given the degree of uncertainty that surrounds the terms of the UK’s “divorce” settlement and a total lack of clarity about what will replace EU membership, despite PM May’s recent speech, which for now is a wish list, currency markets are likely to remain nervous about the Pound.

In summary we are bearish of Sterling over the short, medium and long term on the lack of “BREXIT” clarity. That weakness will continue to fuel the rally in the FTSE. So the combination of solid growth and weak Pound is a powerful driver in the FTSE 100.

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Next story:
16th February - The bulls are still in control of the S&P

Previous story:
12th January - What happened to the Oil rally?

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