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Sentiment as measured by the BTI turned bearish after last week US nonfarm payroll report. The increase in nonfarm payrolls was a surprise given that economic activity is slowing in other parts of the world. The behaviour of mining, banks and oil stocks is telling us to be cautious, these stocks dropped sharply as investors have taken a bearish view on the global economy.
In China, Europe and UK the forecast is for lower growth but in the US it is the opposite view, the economy is strengthening and interest rates will go up. Yet inflation is too low, I wonder why the Fed would raise rates in low inflation environment. In general rates go up to fight inflation, not the opposite. Furthermore the strength of the US dollar is hurting earnings at US companies.
The stock market may rally on increased optimism but upside is limited. There are simply too many negative factors on the horizon, and this should keep a lid on the market. For that reason it’s possible the rally will end below previous targets. I am not sure the FTSE will return to 6600. This is supported by the 34-day BTI. This indicator measures extreme in optimism. A move above 400 signals high optimism, the indicator is currently near that level. Remember, when optimism is too high and the indicator is above 400 the stock market will turn down.
On the positive side the Elliott wave pattern is bullish, and seasonal influence supports a rally. I expect a bounce in banks, oil and mining stocks. Such a move would push the FTSE higher. The period from now to the end of the year is bullish for stocks, sometimes the Santa Claus rally starts in the second week of November. The periods around Thanksgiving and the last week of December are also positive periods for stocks.
The stock market will probably trade in a tight range until the end of the year. There will be some false alerts, and some surprises. My analysis is based on three things; anticipation, reaction, adaptation. I can anticipate a move based on my understanding of the market, but I must react quickly if I am wrong in order to adapt to the new environment. These changes are necessary if one is going to achieve long term success in the chaos that lies ahead.
Thierry Laduguie is Trading Strategist at www.bettertrader.co.uk
