This market is a victim of its own success
06/26/2009
The rally has well and truly lost its sparkle. The FTSE has been trapped in a 200 point range since early May. The range broke to the downside this week but the bulls are not giving up without a fight.
While the banks were the market leaders in March and April, the miners took over in May and early June. Now even the miners are beginning to slide despite fairly robust commodity prices. It's a bearish sign.
A short-term reversal looks overdue. Stock market rallies are prone to bouts of profit-taking. Human nature doesn't change. Traders like to take some profits off the table.
There are other reasons for the lull as well. Firstly we are entering a period of historical weakness for the FTSE 100. Secondly M&A activity has been very quiet, which is a good indicator of confidence. The third reason is probably the most significant - the sheer weight of rights issues.
At the moment, it seems like a case of another day, another rights issue. This week we've had GKN, Punch, Marston's, Holiday Break and Rio Tinto all hold out the begging bowl. In May we had Travis Perkins, Shanks, Great Portland, 3i and Taylor Wimpey to name just a few.
This flood of new shares is money that has been taken away from buying existing shares. All prices and driven by supply and demand. In other words, the supply of shares has increased, which is putting downward pressure of share prices.
It's not all doom and gloom though. There are pockets of value to be found. Some sectors have had a bad run lately and now look good value. They've become victims of the rotation game as hot money has chased more aggressive sectors (miners, banks, life insurers).
Telecoms, media, general insurance and aerospace are four sectors that look due a bounce. There is no fundamental reason for their underperformance. The telecoms and aerospace have already started their move. Media and general insurance are yet to find support, so are more for the pioneers. An active stance in these sectors hedged against a short FTSE would be a way of exploiting the current state of the market.
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