The FTSE 100 made a new all-time high, the index is bullish and it has outperformed other stock indexes in May. Last Friday’s surge to new highs was accompanied by a sharp drop on GBP/USD. News that the Tory lead over Labour had narrowed pushed the pound sharply lower, this helped the FTSE rally. Then we got a strong US GDP report and the pound fell again. But yesterday the pound rallied, it’s not clear if this rally is a dead cat bounce or the start of the next leg up.
The Conservative party is still expected to win the election so logically the pound should rally. Last week drop in GBP/USD could be a pause in the uptrend in which case the pound will rally again. A rally in the pound would coincide with a pullback in the FTSE.
We are still in a situation where a large amount of the good news announced by the Trump administration is priced in the stock market. Unfortunately Trump projections with regard to growth are not credible. Stock markets rallied strongly in January on Trump’s assumptions, now investors have second thoughts, this explains why the S&P 500 has gone mostly sideways since March.
There is no new catalyst to push stock markets higher, only a last leg up based on the wave count. In fact the risk to stock investors has increased because valuations are high and interest rates are on the way up.
The new high in the FTSE is probably not the final one, but if we look at the long term pattern since 2003, the pattern is bearish. The pattern is an ending diagonal [(1),(2),(3),(4),(5)] occurring in the final advance of the stock market, upside is limited. The push above the upper line is a throw over, a common characteristic of ending diagonals. The end of the bull market is near.
