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Time for a look at the bigger picture

Sat, 21st Dec 2013 Leave a comment

Well, it didn’t take long for Mr Carney (the Bank of England governor) to do as I predicted in my last post. According to the FT, he has already started to push the idea of interest rate rises into the long grass. Hopefully, this means that the FTSE will now start to concern itself with the improving picture of economic growth and stop falling back relative to the Dow.

Monthly Chart of FTSE-100 Index at Dec 2013It has done moderately well since mid-2012 and if it could summon up the energy for a final blow-off surge, finally breaking through 7,000 next year, it would be positioned for a crash. I wouldn’t expect an immediate turnaround though – the market could well go sideways for quite a while before sentiment turns. The only problem with this prognosis is that most people seem to be expecting further gains and Mr Market has a habit of disappointing the majority. Looking at the AAII weekly sentiment survey though, we are not in bubble territory yet; it’s time to get worried when bulls reach around 60%, and we are only at 47% at the moment, so there is scope for further progress.

Monthly Chart of Dow Jones IA Index at Dec 2013The Dow has done considerably better than the FTSE over the last eighteen years, quadrupling in value, and looks to be within striking distance of 20,000. It is already quite expensive, but not exceptionally so by recent standards, so I think it is perfectly possible it could hit that target next year. The taper announced on Wednesday was very mild and the stock market responded very favourably due to the removal of the intention to wind QE down to zero quickly. The Fed also promised to keep interest rates low for a long time to come. With a deal having been done on the US budget, the Dow only has to worry about the economy now, which seems to be improving.

Is this the start of a Christmas rally?

Sat, 7th Dec 2013 Leave a comment

Chart of Dow Jones index at 6th December 2013The Dow has risen nearly 25% this year; if it does the same next year it will make 20,000. That would put it on an historically very expensive footing and ripe for a crash, but it seems to be getting over its QE taper jitters, responding very positively to the good employment numbers on Friday, so I think this level is perfectly achievable. The Dow recently broke through 16,000 for the first time and has now dipped below again. It is common for the index to fail to break through decisively at the first attempt when breaching new psychological barriers, but we are now primed for further progress and a Christmas rally could well be in the offing. There is no sign of an interest rate rise yet from the Fed which would scupper the rally by increasing company costs, but the Fed rate is not the only important one. The market dictates bond yields (the interest rate charged on government debt) and it could be this which finally pulls the plug on the stock market rally. The US (and the rest of the Western world) is far too heavily indebted and, if the bond market starts to worry about getting its money back, a crisis could be just around the corner similar to the ones we have already seen with Greece, Ireland, Cyprus and Portugal (only MUCH bigger).

Chart of FTSE-100 at 6th December 2013Interest rate rises are on the horizon for the FTSE though and this is probably why it has fallen back in recent weeks. Bank of England “forward guidance” a few months ago linked IR rises to unemployment falling back and this has started to happen much quicker than it then expected. Now, the government definitely doesn’t want anything to upset the mini housing boom it has set off before the next general election in 2015 so I think it is highly unlikely that the BoE will raise interest rates in the near future, but they have to adjust their policy without losing face. The Tories are looking to the housing boom to create a feelgood factor which they hope will get them elected in 2015 and they will put as much pressure as they can on the BoE (which is supposed to be independent) to toe the line, so I feel sure that the bank will fudge its forward guidance in the near future. With IR rises out of the way for a couple of years, the FTSE will be free to boom as well now that the UK economy is picking up.