The FTSE 100 is still finding resistance above 7750, yesterday the index rallied to 7746 then pulled back. Sentiment, as indicated by my sentiment indicator, is bearish. When sentiment is bearish the odds favour a stock market decline. This means the FTSE is unlikely to break above the previous high. I believe the decline will extend but before the decline starts we could see another bounce to 7750 as the pattern inside the current move up does not appear complete.
The 34-BTI, a trend reversal indicator, was overbought in May and warning us of a multi-week decline. Well, we saw a multi-week decline and the indicator is dropping slowly each day, it is now below 400. It is no longer overbought but it should continue to drop until it reaches oversold at -400. This means the FTSE will continue to decline to bring the 34-day BTI to -400 and lower, this will happen in the next few weeks/months when the FTSE reaches an important support like the end of a first wave.
The pound is still on track to rally and the S&P 500 appears to have peaked at 2791.5. Investors bought the index ahead of the FOMC statement, I am not sure what they were expecting but the statement was bullish for the dollar yet the dollar turned down and the S&P turned down too.
The Fed raised interest rates as expected and signalled two more increases in 2018 and three in 2019. Policymakers gave a bullish assessment of the US economy but this is not really the case. Policy makers always talk up the economy because it is in their interest to boost morale and consumption, they will never admit something is going wrong until it is clear to the majority of investors that something has gone wrong. If you dig into the economic numbers you will see many areas of the economy in trouble like the retail sector and a rise in the number of consumers defaulting on their debt.
I think the dollar turned down because all the rate hikes are priced in and investors now realise that the economy has peaked and there is no reason for interest rates to rise after the current cycle ends. As I said many times, if people accept that the economy has peaked and inflation continues to rise, investors will panic and it looks like we are going that way. The latest US CPI and PPI data was stronger than expected, therefore there is little incentive to be invested in the stock market.
As we move forward and people realise the rate hikes are hurting the economy, they will sell stocks. There is no doubt the S&P is in a bear market, but the index must remain below 2802. Any move above that level would delay the bear market.
