The rally in the FTSE 100 extended following a better-than-expected GDP number and rumours the Bank of Japan will announce a new stimulus package. Later in the evening the index pulled back after the release of the FOMC statement.
The Fed kept interest rates unchanged but suggested a possible rate rise after the summer. This was expected, because the US economy has been doing better. The question is will the S&P 500 continue higher after the summer, given the new cycle of rising rates and high valuations?
The S&P is trading at 17.2 times expected earnings, which is high by historical standards. This combination of factors will cause the rally to stall; this should coincide with the end of the Elliott wave. Right now there is still upside potential. Last night Facebook (NASDAQ:FB) and Apple (NASDAQ:AAPL) posted better-than-expected earnings and the stocks were sharply higher.
The fact that Japan will announce a new stimulus package 27 years after its stock market peaked is a clear indication that monetary policy on its own does not work. How many stimulus packages has Japan introduced in the last 27 years? I have not researched the numbers, but I guess the Bank of Japan has been fighting deflation since 1989 and without success.
The Japanese stock market is down since 1989 and the economy is still weak. Japan is still in a deflationary cycle with negative interest rates. And Europe is going the same way, with negative interest rates and weak growth.
In the UK, economic activity has deteriorated sharply in the last four weeks and there are rumours the Bank of England will introduce negative interest rates, like in Japan and Europe. The only difference is that inflation will go up as a result of the decline in the pound.
After the strong rally of the last five weeks the FTSE is losing momentum because the index is overbought. It is in the final wave up and this move is nearing an end. The top will be near 6800. I expect a move down to the 6600 area in the next few weeks [wave iv (circled)].
