I recently had an article published in the Market Technician journal of the Society of Technical Analysts that highlighted a financial market oddity that ‘old hands’ are familiar with. The idea is that the FTSE 100 can serve as a confirming indicator for moves in the US stock market at times, and the failure of the FTSE to follow US shares to new highs is worth noting as a warning signal to bulls.
The problem with some of these ‘rules of thumb’ is that they are difficult to quantify or put into a trading model, but that shouldn’t detract from them being interesting to fund managers and worth keeping at the back of your mind when you see the US market making new highs but the FTSE is not following along. In fact, it would seem that the FTSE is leading the way in sentiment and can drag US shares back down with a bump.
The examples that I used in my article were the 1987 and 1989 pullbacks (crashes in those days), the turn lower in 1999/2000 and the credit crunch drop in 2008. The 2018-2020 cycle provided a double whammy (so far) as the FTSE failed to follow the US market higher in both years.
The FTSE 100 can be seen as a mix of ‘old economy’ shares to some extent, with a hefty dose of industrial, banking, pharma, telecom and energy exposure. US indices have a different make up, and in the journal article I used the DJIA as this is the index that is usually referred to by non-financial media for public consumption. Is this ‘failure to confirm new highs’ a sure-fire indicator to bet the farm on? Of course not. However, for those looking at relative performance plays, balancing portfolios and other asset allocation decisions, the fact that the FTSE 100 (which reflects key global cyclical sectors to some degree) is not matching US market highs, should be one more consideration within the investment process.
The chart of the daily highs (below) in this blog is one of the many that are in the STA Market Technician journal article, and is updated to 6 October 2020. Of note is that the DJIA, unlike the NASDAQ 100 and S&P 500, has not broken the February 2020 high yet. But the divergence between the US index and the FTSE 100 is very clear – and sounds another little warning sign, again.