FTSE set to grind above Friday's election result

If I had to choose one word to describe the FTSE 100’s progress over the last year, it would be “grinding”.

If I had to choose one word to describe the FTSE 100’s progress over the last year, it would be “grinding”.

The benchmark marked at least one fresh record high per month between September and May and has already notched another in June. However, this history-making is happening against a backdrop of some of the lowest volatility seen in years. Variance, in average true range terms, is currently around 50 points a day, after a four year low of about 40 in January. 

The FTSE’s run of records seems counterintuitive against such a halting advance. But the UK benchmark is in fact matching the U.S. 'Trumpflation' trend, whilst European indices have also begun to post new all-time peaks in recent months. There are even grounds to see the trend as global. MSCI's 46-country World Equity Index has marked multiple record highs so far this year. 

Above-average outperformers above their average trend

Whilst the global backdrop looks supportive, the one local is too. We can gauge the performance of individual FTSE shares with a key long-term trend indicator, the 200-day weighted moving average. Despite its simplicity, the 'vanilla' version of the indicator is an important tool due to its ability to smooth out short-term noise.  The 'weighted' version is also simple. It merely assigns greater importance to more recent data on the assumption that current performance is more relevant.  The refinement reduces noise even further. 

With around 70% of FTSE constituents currently trading above their weighted long-term average price, we can be confident that the blue-chip uptrend is exceptionally broad-based and that it will probably be resilient to short-term headwinds. Presumably, these include an outcome from Thursday's general election that could unsettle the stock market.

As a caution, we must note that staying bullish on stocks above their 200-day average is not a failsafe strategy. Signals neither prove our assumptions nor predict the future. Still, short-to-medium-term price momentum is a well-established effect. We can expect outperforming shares to continue to do so for a while, regardless of causality. The effect works both ways as well and it's worth taking a look at shares that are failing to make the 200-day grade.  

The laggards

Doing this can underscore negative sentiment on certain stocks, reinforcing a bearish stance. Alternatively, scrutinising ‘200-day laggards’ can alert us to shares that may be about to undergo a trend change. 26 FTSE shares closed below their 200-day weighted moving average on Wednesday. The table below is a snapshot from Thursday. It shows one-day, yearly and year-to-date price moves, and industry sectors.

STOCKS BELOW THEIR 200-DAY WEIGHTED MOVING AVERAGE THIS WEEK


Source: Thomson Reuters and City Index

The high street and the grid

The table immediately reveals underperformance patterns across sectoral lines. Commodities sectors, including mining, consumer industries, like retailing, oil producers and utilities appear more than once. Many of these confirm widely observed weaker trends. For instance, inflationary pressures from weak sterling, low real-wage growth and an uncertain economic outlook are beginning to hit consumer stocks. Among miners, Rio Tinto and Anglo American, a slowdown is showing as investors rotate, following a surge on the back of rebounding commodities prices last year that lifted some shares by triple-digit percentage amounts. A shakier outlook for metals prices this year is also weighing.

Utility companies, SSE and Centrica are the clearest nod to Thursday’s general election. Chances that the Labour Party will get an opportunity to privatise energy providers as pledged in its manifesto still look remote on election night. But there’s no respite for the perennial whipping boy utility sector either way, given the Conservatives plan to “introduce a safeguard tariff cap".

The turnaround plays

Still, as suggested, many of these challenges are historical, and may even have passed in some cases. For instance, Barclays finally got regulatory permission to dispose of most of its Barclays Africa stake last week. The sale will lift its capital ratios closer to that of its rivals’, removing a key concern for investors. Similarly, Babcock posted higher profits late last month, saying long-term contracts provide more revenue visibility than some investors are factoring in. For Anglo, exposure to precious metals amid a volatile geopolitical environment may be protective.  Rio and Imperial Brands are largely flat for the year, emphasising potentially marginal rather than outright poor prospects.

Other indicators can help screen ‘in-between’ shares. On Thursday two of our laggards, Rio Tinto and Experian, matched shorter-term bullish criteria, like an ‘undersold’ relative strength index, and breakouts in higher-than-average volume. Experian, troubled by forex effects which lopped 11% off 2016/17 revenues, still managed to post flat profits as asset sales and an organisational revamp enabled it to call an end to FX impact. The miner, like peers (including Anglo) is doubling down on debt reduction whilst cash generation is rising as asset sales continue. These moves are lifting dividend expectations.

We can also get visual clues from a normalised chart of price returns over a specified period, as per below. For instance, we can assume that sentiment on a stock like BT—whose price progress continues to point lower—will be different to that for a share like Rio. The Anglo-Australian giant recently rose into the black for the year and has an upwards trajectory.

Recouping laggards can potentially join the tally of FTSE shares showing well-grounded strength.

POTENTIAL ‘TURNAROUND’ SHARES

Source: Thomson Reuters and City Index



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