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FTSE didn’t go quite to plan, but I was close!

Thu, 14th Jul 2016 Leave a comment

Chart of FTSE-100 at close on 13th July 2016Well, I was right to call 6410 the peak for a couple of months, though the index showed more volatility than I expected. The low for the period was slightly below my call, at 5,923 versus 6,000 and the low for the first dip was also around 50 points lower than I predicted. I was also right to call a final dip bottoming out at about 6,000; who’d have thought that the FTSE would surge (after a couple of days of mild panic) in response to an unexpected Brexit vote? Brexit is far from a done deal though, and I wouldn’t be at all surprised if Teresa May, the new UK Prime Minister, finds a way of avoiding going through with it.

In the short term, I see the FTSE taking a breather after its recent run; I am looking for the index to pause at its current level, then drop back 240 points or so to below the 20 day-moving-average (the green line above). Thereafter, I see good progress being made, perhaps to around 7,400.

In the longer term, the US and UK stock markets don’t seem as overvalued to me as some commentators think: the Dow Price/Earnings Ratio is still below 20, which is above average, but well below danger levels. Given the ridiculous prices of western government bonds, with yields going negative, I think that stock markets still have a long way to go. A P/E of 30 is what I generally consider expensive and I suspect that this value will be exceeded significantly if share prices get as silly as bonds. So I still wouldn’t be surprised to see the Dow going well over 30,000 in the next few years and the FTSE reaching 14,000 before the financial system spectacularly falls apart.

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