The Footsie has been very predictable this year: buy when it is oversold, and sell when it is overbought. It was last overbought at the end of November 2014, at around 6730. Since then, it has come off the boil, and is now 6600. There’s a more worrying trend:
I have marked “highs” with red circles, and “lows” with blue circles. The market appears to now be selling off again. Notice how the second high is lower. We are now entering an interesting phase: will the lows get lower? I suspect it may take a couple of months to answer that question. But, if the low is lower, then I would take that as confirmation that a bear market had been in effect since around May this year. Odds would likely favour quality growth companies on reasonable valuations as holding up best if this turns out to be the case.
Valuations don’t look particularly stretched, but you may need to hold onto your hat anyway.
Just my 2 cents.
Incidentally, you may be interested to know that the chart above was prepared using IPython and matplotlib. The cirecles were added in using Inkscape. I’m becoming increasingly impressed with using IPython and the SciPy suite of modules for performing exploratory data analysis. I toyed with the idea of getting Mathematica, but that costs money, and there is so much that can be done analytically using Python. I would be interested in hearing if anybody thought that Mathematica was the only way to go.
Update 10-Dec-2014: The 200dMA is currently in downtrend:
Detractors to the market top counter with the argument that the S&P 500 is making all-time highs.
Note, however, that the S&P 500 is up 12.1% YTD, whilst the UKX (Footsie is down 2.7% YTD. So there’s a difference in fortunes. Oil and commodities are being clobbered at the moment, and they form a large part of the Footsie. BP has gone nowhere for years and is heading back down towards its 2010 Deepwater Horizon crisis levels. It is also laying off staff on the back of poor oil prices. Some oil services companies are taking a high hit: PFC (Petrofac) is down 40% YTD. ITRK (intertek), which has an oil services division, is down 30% YTD. The weakness in oil is not wholly to blame, though. ITRK was on a lofty valuation, and its growth has moderated, leading to a significant re-rating.
There’s a debate as to whether depressed oil prices is bullish or bearish. Ken Fisher covered this topic in his book “The Only Three Questions That Count”, and concluded that rising oil prices was bullish. Rising prices was a sign of economic health.
Stockopedia’s technicals are worth a look too: there are 1311 stocks below their 200d MA, significantly more than the 755 stocks above their 200dMA. That statistic should be interpreted as a sign of bearishness.
Caveat: this blog post should be considered “just a bit of fun”. I myself am significantly invested in stocks. So it’s a “prediction” not to be taken seriously.