Expect more FTSE double-think next week

An increasingly split Britain—again laid bare by last night’s shock election result—now has an increasingly split stock market.

The divide

An increasingly split Britain—again laid bare by last night’s shock election result—now has an increasingly split stock market.

The theme of stocks which generate most revenues in British currency against those that do more business abroad, is one in which investors are now well-drilled since sterling’s Brexit vote collapse. The topic has been front and centre ever since, and was very much in evidence on Friday. The latest upset for the British political establishment lopped off a chunk of hard-won sterling value. In turn, UK-listed stocks again, rose and declined along sterling-related lines.

The schism does, however, work between as well as within markets. True, UK-facing firms weighed down the mid-cap index on Friday as the cable struggled to contain losses to about 200 points. But the dividing line between FTSE 100 and FTSE 250 risers and fallers was also clear. The top 10 gainers on the latter were dominated by dollar-earning miners, and the bottom of the FTSE was occupied by property developers, utilities, banks, retailers and other firms catering to UK consumers, like BT and Royal Mail.

This schizoid tendency is a partial explanation of why, despite a string of new milestones this year, the FTSE has largely moved at a snail’s pace. It is trading within one of the lowest daily ranges for years. Those ranges contracted from a peak soon after the Brexit vote to a four-year low in January, according to average true range variance. Volatility has barely got off that floor since. Whether or not it is a risk for the upside is unclear, though it almost certainly makes the market more slippery for buyers. This looks to be the case in the key tradeable version of the benchmark index, FTSE 100 futures.

Short-range strategy

  • FTSE future’s continuation chart shows that ATR divergence since post-Brexit-vote lows has reached a visible extreme.
  • A background fall in widely distributed market confidence, and, perhaps participation is implied, though it is risky to assume that the market will finally run out of puff and face a significant correction.
  1. For one thing it has rallied for months with little sign of that happening to date.
  2. Nor does ATR, strictly speaking, have much bearing on price direction and trend duration.
  • Still, with the ATR close to 3-year lows and the market running within two confined rails (an asymmetric channel) a scenario can be envisaged in which the range is too thin for a break out.
  • If that thesis is correct, a failure of the market at recent highs of 7589 may be indicated.
  • We think the chance of that failure would rise should the ATR fail to break above the trend line that has capped the gauge since early July 2016.
  • By deduction, a breach could suggest a dilution of the narrow set of bulls that have carried the market higher since then, though time would be required to build momentum.
  • Again, a caution: range expansion might have a long way to go, but could still favour the upside, particularly whilst the market is clearly supported around 7380.

Source: Thomson Reuters and City Index - click to enlarge

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