The FTSE made a new low below the 20th January low; the index is now in a support area. A support line drawn from the lows on 16 October 2014 and 24 August 2015 stands at 5600. Yesterday’s slide in the oil price was accompanied by a slide in bank stocks. However, I note that oil stocks are strong relative to the FTSE as are mining stocks. So despite the weak oil price ,resource stocks are strong, an indication that we may be near a bottom.
The reason the FTSE has not started to rally is because bank stocks are still weak. I suspect fund managers will step in to buy bank stocks and the market will rally. The FTSE is at multi-year lows, the S&P is near its October 2014 low, and when the market falls too far fund manager will start to buy stocks as they believe the market goes up in the long term.
The slide in Japanese stocks does not help. Despite the huge amount of stimulus provided by the Bank of Japan, Japanese stocks are sinking fast. This afternoon Janet Yellen will testify before congress, so the market will probably become more volatile after 3pm. Yellen’s view on current market turmoil and what she has to say about future US rates will move the market one way or another. If she sounds dovish the market will rally.
Central bankers tend to be dovish after a large decline in the stock market. Yellen knows that if the stock market slide continues, this will dent the US economic recovery. As I said there is support below 5600, and yesterday’s decline pushed the FTSE briefly below 5600. This morning the index is bouncing back in pre-open, and the bounce should extend in the short term. An initial target is 5800.
