Sentiment is no longer bearish but it has yet to turn bullish. Sentiment as indicated by my sentiment indicator (BTI) is accurate. The BTI turned bearish in June, since then the FTSE 100 has gone down / sideways. When my sentiment indicator is bearish the odds of a stock market decline are high.
Given the strong support above 7300, the strength of the US markets and the overlapping nature of the wave during the recent decline, chances are the FTSE is not far away from a bottom. What is remarkable is the strength of the US markets, there is no pullback, only sideways or up. At the moment earnings are acting as a catalyst, this is one reason why US markets are at all-time highs. Companies tend to beat forecast because analysts’ forecasts are too low in the first place. It’s a way of manipulating the market so it goes up.
Another reason why stock markets are at record highs is because people fear an economic downturn and they see the stock market as a safe place to be. If they invest in the economy and there is a downturn their money is not safe. But if they invest in the stock market and the stock market goes down the central banks will come to the rescue with stimulus so the stock market is safer than the economy. What they don’t realise is that when the time of a stock market crash comes, stimulus or not, stock market investments won’t be safe. This moment is fast approaching.
Another reason is because bond yields are still at low levels, when bond yields are too low and interest rates are at record lows, there is no alternative to make a good return, in fact the only alternative is the stock market. This is why in periods of low interest rates demand for stocks increases. Wait until these yields start to rise, and when the economic downturn comes, bond yield will spike as the risk of default will rise.
The bottom line is that investors anticipate an economic downturn without realising that their money is not safe anywhere, including in their bank account. That is because in the event of a serious financial crisis, banks are planning to freeze bank accounts in order to avoid another bank run. They have learned their lesson from the last financial crisis when a run on Northern Rock contributed to the collapse of the UK lender.
The best signals occur when both the BTI and the wave count confirm each other. For example the FTSE is near a bottom, if the final leg down end and sentiment turns bullish, that will be a good signal to go long. Right now we are in the fifth wave and the target is 7330. I expect a rally from that level but the FTSE is ulikely to make a new high. The index is in the early stages of a bear market.