If you are something of a cynic such as myself then you may agree with the idea that the magic of the stock market is actually encapsulated in the reshuffle process. This is currently going on with the FTSE 100 and other leading UK indices, whereby a steering committee rejects companies whose market capitalisations have fallen below the values of their peers and replaces them with new upstarts that will presumably go towards boosting the index they have just joined.
If all this sounds somewhat Darwinian, then it is. Probably because in many ways this is a process of “survival of the fittest” or at least the biggest. Over time, cutting out the chaff ensures that an investor in leading UK companies will always be able to choose from a list of those groups which are relatively stable, have liquidity, and are widely held. Much has been made of the way that the FTSE 100 only recently managed to break its former record highs set as long ago as 1999. But of course, if some of the companies in the index all those years ago were still in the index, it might have taken decades to break the record. This is despite the fact that some new names appear through mergers and acquisitions, through which one of the giants – Cadbury was finally lost.
Over the years we have lost such luminaries as Northern Rock and Bookham Technology, to be replaced by new heroes, the latest of which is backed to be Hikma Pharma (HIK). In fact, it is worth looking at the recent charting history of Hikma as it is typical of the run-up to a stock getting promotion to the FTSE 100. Indeed, it is so typical that a few months back it was the subject of my Monthly Pick in SpreadBetMagazine, when the shares were well below £20. What is amazing here is the way that the shares have been wholly above their 200 day moving average since the summer of 2012, a remarkably long time, something you only normally see in stock market greats such as Apple or Google.
The charting position shows the way that we have been in ultra Bull mode since the autumn of 2014 when the 50 day moving average now £23.24 was recovered. This feature acted as support on dips, with the last example being a December just before the early 2015 unfilled gap to the upside. The view now is that at least while there is no end of day close back below the 50 day line, we should seek further upside for Hikma, even though the shares have already come up a remarkably long way. The target while above the 50 day line is seen as being as high as the top rising trend channel from September to £28, a target which could be achieved as soon as the next 6 to 8 weeks.
The company which Hikma replaces could be argued to have suffered an equal and opposite fate from a charting perspective since the autumn of last year. The irony is that Tullow Oil (TLW) was not exactly on fire even before the oil price collapse of recent months. The shares have actually been below their 200 day moving average since the autumn of 2012, with the latest ultra bearish phase starting with the loss of the 50 day moving average currently at 391p in July. While last month delivered a temporary break above this feature, unless it is recovered over the next few weeks, one would suggest that life down in the FTSE 250 could be just as fraught as it has been in the blue chip index.