Where next for the FTSE at 5800?

In the midst of a so called “summer”, with volumes very low, it is often the case that the main stock market indices can move around in quite a volatile way. Not this year however with a slow grind higher being experienced week by week in total contrast to last summer where bad news on the Eurozone front created the worst August conditions for many a year. A near 1000 point fall was a hefty kick in the” what-not’s” for many investors.

The last 15-20 years have been interesting to say the least. Starting in 1996 with the Dot Com bubble that was borne in 1996 and which juiced shares to all time highs on the eve of the new millenia – levels which, in the UK, have not been seen again. Indeed, we are still some 20% lower nearly 13 years later…

After the heavy sell-off that took us to the current millenium lows in March 2003, Alan Greenspan rode the rescue and introduced a new era involving massive liquidity and low interest rates. This in turn sowed the seeds of the global property  and leveraged based financial boom. We all know how this ended in 2008. Even today in 2012 we look out at a mess of Quantitative Easing and easy money trying to desperately re-balance a world that is heavy in manufacturing capacity but with little in the way of decent investments to be made. Throw into the mix the phenomenal amount o de-leveraging which is required by Governments, banks and individuals and we have an extremely moribund growth profile ahead.

Today the FTSE stands at 5800 and there are many commentators of a bearish viewpoint who suggest that the current low volumes and economic perma-crisis mean that the markets are on the edge still and poised for a third big dip.  The fundamental backdrop is one of high cash balances on corporate balance sheets, an attractive valuation from a dividend yield and PE perspective and no real alternative to equities with Gold yielding nothing and Bonds massively overvalued.

Take a look at the 15 year monthly chart below. Nothing in that chart picture looks to me as if we are going lower – we are just about to probe a near term trend line from 2007 around 5950 – a break through here will be very bullish. The 2 red circles show the 9 & 27 month exponential moving averages – you will see that a cross over of these is very bearish with prices falling precipitously when this has occurred. Contrast that with today where we have the bullish cross over to the upside still intact. With a supportive RSI that is nowhere near overvalued that has created a ripe background historically for falling prices, positive momentum on the MACD and similarly supportive stochastics and I fear the bears will be disappointed in the months and years ahead.

The chart above is definitely worth watching – should the FTSE roll over however down to the 5600 and the 9 & 27 month moving average cross down through each other – watch out as on each occassion before that this has happened, serious doo-doo has hit the market and the world in general.

Cityunslicker & Editor