Sentiment is bullish but the Top 20 Differential is overbought at 3.7%. In an uptrend an overbought Top 20 Differential means the blue chips have risen too far too fast. In general it’s a short term sell signal, the trend is up and the FTSE will pullback to complete a counter trend decline.
The FTSE has been driven by mining stocks, the sector is in a long term decline and from time to time we see some dead cat bounces. I suspect this is another one. Mining stocks may pullback today after China posted weakest growth since 2009. Chinese GDP grew 6.7% in the first quarter in line with forecasts.
As we move into the second half of April and closer to the June referendum, policymakers are increasingly concerned by a Brexit. The Bank of England warned that EU exit is likely to hurt the economy with 100,000 financial services jobs at risk. According to IMF managing director Christine Lagarde, a Brexit could derail Europe’s fragile economic recovery. Given the potential effect of a Brexit on the economy I expect investors to become more cautious ahead of the referendum. This means upside in the stock market is limited.
As noted the FTSE is in the final leg of the advance, I believe it’s the final leg of the advance because we already had record percentage bulls a few weeks ago and the rally has gone further than expected. I don’t have the latest number but I suspect the percentage of bullish investors to be 80% or more. This kind of high percentage is associated with market tops.
In February when the FTSE was trading at 5500 it was the opposite, the percentage of bulls was very low and the percentage of bears very high and the market rallied. The general rule is that if you feel extremely bullish it’s probably time to take profits on your long positions.
Also the wave count is nearly complete, a five-wave rally inside wave C accompanied by record percentage bulls and overbought Top 20 Differential provides a high confidence scenario for a decline in the weeks ahead.
