The FTSE 100 has been very weak recently, the S&P 500 is hitting new highs but the FTSE is trading some 140 points below its previous high. You will recall that the FTSE is the leading index, when the FTSE does not follow the S&P 500 higher, trouble is brewing.
Right now I can’t say what’s causing the underperformance, it could be Greece or a weakening global economy or a new wave of pessimism. The BTI is declining which means sentiment is bearish and in this situation investors will take profits quickly because they don’t believe the rally will extend. This could be the reason why the FTSE is stuck below 7000. Even talks of delaying a rate hike until 2016 failed to boost the index.
I believe that Greece is the focus of attention, the risk of a Greek default is growing but US investors don’t seem to be worried judging by the behaviour of the S&P 500. US investors should keep an eye on the FTSE, this index is telling us that the market will sell off.
When sentiment is bearish people interpret the news in a bearish manner. If the economic numbers are strong they fear higher interest rates and the market will go down. If the numbers are weak they fear a global slowdown and the market will go down.
Yesterday the FTSE rallied to 7015.5 but the index was unable to continue higher. This level could be the end of wave (c). I was expecting wave (c) to end higher, but the index is too weak. You know what I am thinking right now, if the index can’t rally there are not many options but to go short. The main risk of going short here is if Greece finds a deal with its creditors, in this event the market will rally.