FTSE 100 to hit new highs? By Zak Mir

Over the past 15 years there have been plenty of times when the bulls could have justifiably sung victory regarding the prospect of the FTSE 100 getting above and staying above the 7,000. One of the more convincing near misses was in the summer of 2007, clearly not a great time to be going long of equities, or indeed, anything other than put options.

There was a close call once again last September – before both the Scottish Referendum, and the halving of the crude oil price. Presumably most of our friends will be just as relieved to have dodged the impact of cheap oil on “Scotland’s oil” in the North Sea by the choice to stay within Great Britain.

But the latest rally for the FTSE 100, to leave it through 6,800, is arguably the strongest ever seen.

This is because despite a modest revival for some large miners exposed to the price of gold, the current index level is missing the help of most of the resources plays. This is significant given how heavily weighted the FTSE 100 is to these sectors.

The good news is that the latest leg down for crude below $50 has not been accompanied by a decline for the likes of BP (BP.) and Royal Dutch Shell (RDSB). Whether this “positive divergence” continues remains to be seen if the underlying commodity goes on to break the 2009 support under $40. However, so far it would appear that the “smart money” does not expect the lowest levels we are seeing currently to be maintained for long.

So the question is what part of the stock market might be best placed for high beta gains should the UK index do what it has not been able to do since the end of the last century – make new highs.

The usual area of the market to do best are the insurers, and even though this could be the exception that proves the rule, it is logical that given how exposed the sector is to the fate of stocks, we should see a disproportionate bump to the upside even if any stay above 7,000 is only brief. After all, we have the Russia / Ukraine conflict brewing up again, and the Syriza / Grexit issue to handle.

Looking at perhaps the strongest insurer on a fundamental basis first, Prudential (PRU), it can be seen from the daily chart this elephant really has been able to gallop in recent sessions. From a technical perspective it is almost as if the two unfilled gaps to the upside last week indicate that the sudden realisation a new high could on tap for blue chips has caused buyers to panic into this situation. What is interesting now is the way that even though there have been sharp near term share price gains here the stock with a RSI at 69 is not quite overbought. This would suggest there may still be a decent amount of gas in the tank in terms of positive momentum. On this basis the expectation is while Prudential remains above the initial December resistance at 1,573p the upside here over the next 1-2 months could be as great as the October 2013 price channel top of 1,800p.

Finally, an alternative insurance play for those who do not wish to knowingly be “buying at the top” is RSA (RSA) where we have a stock which could be classed more in the recovery play space. That said, the latest unfilled gap to the upside through the 200 day moving average at 464p is as forthright a technical buy signal as one could wish to see. The suggestion now is that provided there is no end of day close back below the floor of the gap and the 50 day moving average at 547p, the shares could stretch as high as the December price channel top at 520p by the end of March.