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Commodity Exposure Hindering FTSE Gains

ByThierry Laduguie
Published 11/06/2014, 08:58
UK100
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In the absence of major news stock markets are pausing. After the long rally of the last few weeks in the US and in Europe investors are now focussing on valuations and taking money off the table. In the UK the FTSE 100 continues to lag other indexes, there is no rally here but a sideways move since mid May. This underperformance is due to the weakness in commodity prices, banks and emerging markets.

A large proportion of stocks in the FTSE 100 are exposed to commodity prices and emerging markets, when commodity prices go down and economic activity in emerging markets slows, these stocks will underperform the market. It is no wonder the UK index is weak. The thing is, these sectors are weak for a good reason. They are pricing in some bad news going forward. Hence, the weak price action.

As sentiment is bullish we could see higher prices in the short term but in the next few weeks or few months chances are the FTSE will be trading lower. Some measures of bullish sentiment are already at an extreme, a condition associated with a market top. The 34-day BTI is not yet at an extreme but not far away either, a continuation of the rally would push this indicator over the limit in which case it would send a sell signal.

FTSE 100

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