China Dominates – FTSE 100 Stirs – The Goalkeeper Problem

Fri 26 Apr 2024

By Brian Dennehy

Access Level | public

Market commentary


quoteUsing technical analysis as the sole tool in your investment armoury is very limiting, but it certainly has its uses. For example, it can enable you to build a road map, which makes it considerably easier to see when your expectations for a fund or stock or index are going awry. 

This prevents you becoming too wedded to one outlook, and gets you off the hook before you make an expensive investment mistake. Very few of us (none of us?) are good at acknowledging an error, so if you can say upfront “…but if this happens my road map must be wrong hopefully you will overcome one big behavioural problem, whether you are a DIY investor or fund manager.

Using a stop-loss works in a similar way. If the price of your fund (or stock) falls by, say, 10% it doesn’t mean that you were wrong per se. But it does mean, as a minimum, that your original idea is not working out as planned – unless your plan was for it to fall 10%! 

Of course the get-out for investors of all shades who are lazy or over-confident or both is that “the market always recovers”. They have no sense of, or conveniently ignore, the trials of Woodford, the collapse of Scottish Mortgage, or the multi-decade downturn in the Japanese stock market, and many similar episodes. In my experience, the worst fund manager faux pas of the last few decades could have been substantially avoided by using a straightforward stop-loss.

If you have been told that stop-losses don’t work, it is more often than not by people who have never crunched the numbers or applied them in practice. Explore some of the research by having a look at “Stop Loss For More Growth And Less Risk”. Then explore our unique Stop Loss Tool – it’s free, so there is no excuse.

Back to that technical analysis, on 15th March this note said:

“The FTSE 100 chart has the distinct look of an index breaking higher. If so, it should quickly break up through the previous all-time high a little above 8000... Our textbook analysis implies a peak around 8200, 5.4% ahead.
The S&P has a target of 5361 set out in the 1st March Friday Note. Similarly, the 21000 target for the FTSE 250.”

So far each of these indices has fallen just short of these targets, and the road map implies that this is a Spring breather before moving towards these higher levels. 

For example, the S&P peaked on 28th March, and that breather does not yet have the look of being complete, and yesterday fears of stagflation resurfaced, which could certainly push it lower still. Ideally this index would fall into the 4700-4800 range before turning around and back up towards 5361. In contrast, a fall through 4700 would put a dent in our modestly optimistic road map for that S&P peak, which is 6% above the index level as I write.

The FTSE 100 is notable because, despite the drift down in the US indices, it has reached a new high above 8000, as we expected. Our projected peak of around 8200 is just 1% ahead. A rise much above 8200 would imply somewhat more upside, but we will review that as and when. For now, don’t be seduced by headlines or suckered by Goalkeeper Syndrome – the overwhelming need to dive for every shot, when standing still is statistically a far better option.

Over the last week it is the FTSE 100 and the broader Chinese equity indices which have been the leaders amongst major equity markets around the globe. From the 28th March China has dominated global stock market indices e.g. FTSE China 50 up 5.4% versus minus 4.25% for Japan’s Nikkei 225.

This kind of upward momentum for an index, combined with relative strength versus other major indices, is notable.

The differential is not so great for the FTSE 100 (up 1.1% versus minus 3.5% for the S&P since its peak) but it does indicate positivity towards this index, particularly with all other European indices being down over this period. This does not reflect confidence in the UK per se (though that is hinted at with the mid and small cap indices), but rather that a strong dollar immediately boosts the dollar earnings of companies which dominate the footsie. 

That the footsie is predominantly a Value-style index also helps attract global investors, who are increasingly aware that in an era of inflation volatility it is Value which has the edge over Growth. Within that collection of Value stocks are a number of resources companies and multi-nationals, the attractions of which were highlighted this week by the bid approach for Anglo American (albeit rejected this morning).

Talking of resources, looking at gold, and applying that technical analysis, our road map is pointing at $2884, which is 22% above the price today. It needs to get through a cluster of resistance around 2455-2515, and if it falls to $2250, 5% down from today, that very optimistic road map is in serious doubt.

You might have already read about the pull in gold, where Western investors have been selling persistently for some time, while central banks have been equally persistent buyers. One new element in recent months appears to be non-government investors in China.

In a country (a bit like India and other emerging markets) where there is limited trust in governments and savings institutions, gold has had historical attractions. According to the FT (23rd April) Chinese investors are “aiming to diversify from their crisis-ridden property sector and sagging stock market.” I recall very vividly from the 2006/7 bull market in China that when their domestic investors get the bit between their teeth, they do not hold back.

Regular readers know that I have no bias to gold, on the contrary (this being one of my favourite blogs). Too much nonsense is spoken by otherwise smart people about gold being a safe-haven or inflation protection or a hedge against every possible outcome. But I am much less inclined to argue with a vast army of Chinese investors with mountainous savings and a tendency to take punts.


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