Yesterday the FTSE crossed above the previous high of 6950.6 set in December 1999 at the height of the dotcom bubble, but by the close of business the index was below that level closing at 6949.6. It's been a real struggle for the UK index to register a new closing high, even yesterday when we thought the index was about to close at a new all time high, it pulled back in the last minutes of trading to close below its all time high.
The rally was triggered by Janet Yellen who was speaking to the Senate Banking Committee. She pointed out to the need to raise interest rates but not immediately, investors were relieved and the stock market rallied. Her testimony will continue today so expect some more volatility. On the economic front the news was mixed yesterday, consumer confidence in the US was lower than expected and mining stocks were strong after Bhp Billiton (LONDON:BLT) reported better than expected results.
The new intraday high in the FTSE will attract buyers but if history is any guide buying at these levels could be catastrophic. I remember December 1999 because everyone was talking about the "new economy". Too many people were only interested in trading technology stocks, they thought software, hardware and internet related stocks would make them rich. People were convinced the bull run in tech stocks would go on for many years so they kept buying the dips.
They called this revolution the new economy and dumped stocks in the "old economy", stocks from traditional sectors like beverages, food producers...When the Techmark index started to decline in 2000, they bought more stocks, then they bought more again, and again. But the index never recovered, tech stocks were simply overvalued and those who bought them were living in fantasy land. Most people who invested in tech stocks lost money.
Today the situation is slightly different, but the mentality is the same. There is an army of people who think this bull market will go on for years. Optimism is high as it was at the height of the dotcom bubble. The thing is, when optimism is too high the stock market is at risk of a severe correction. This is where we are now, I know optimism is high because the 34-day BTI is overbought. This indicator measures extreme in optimism/pessimism. If history is any guide, the stock market is near the start of a long term decline. We may see higher prices in the next few weeks but the long term picture is grim.
Right now the FTSE is near its all time high like in 1999. Optimism is high, the stock market has been manipulated by the central banks for years but the stimulus program has failed to produce inflation as economists expected. Instead deflation is now the new threat. This is a recipe for disaster.