The FTSE 100 has turned down and is now declining in line with the short term forecast but the BTI (sentiment indicator) is still rising. In fact the FTSE is down since 15 May but the BTI is still rising (bullish divergence). By now the BTI should be declining.
When the FTSE turns down the extent of the decline can be determined by the position of the BTI. The general rule is that when the BTI is rising the decline will be short lived whereas when the BTI is declining we can expect a longer decline. Because this indicator is rising, sentiment is still bullish therefore the decline should be short lived.
Obviously things could change, for example the BTI could turn down at any time. In terms of news, the market is not responding to good news at the moment, investors are focussing too much on Iraq. Yesterday's US consumer confidence and new homes sales numbers were better than expected yet the FTSE closed down. Oil stocks are doing well due to the rising oil price but that was not enough to keep the FTSE in the green.
The FTSE underperformance (relative to S&P) will end but I think before it ends the S&P 500 will probably go down further. At the moment my prediction is right, I said the FTSE would drag the S&P lower, that's happening right now. There will be a time when the FTSE will start outperforming the S&P (strengthening) this could happen below 6700.
