Forecasting a Year End Rally for the FTSE 100

As per several requests for a stock market analysis update, here is my current summary outlook for the FTSE 100 Stock Market Index. The FTSE 100 index has continued to build a base following the Great Crash of 2008 that took the index to a low of 3665, having since recovered to 4383, up 718 points / 19.5% in just 5 days. Whilst the day to day volatility has presented short-term traders with great opportunities, it has left long-term investors shell shocked.

Whilst the stock bear market may not be over, as detailed in the my earlier article of 20 Oct 2008, Stocks Bear Market Long-term Investing Strategy, subsequent price action has triggered the 10% scale in investment rule during the last 10 days of October, more on this in a future update. However the recent price action confirms earlier trend expectations for a rally inline with the seasonal tendency into year end. The expectation is for December to be the stronger month and therefore this implies that November will exhibit further sideways base building trend, which implies that we can expect an imminent trend towards the lower end of the indicated wide trading channel.

The FTSE is expected to exhibit a volatile trend into year end and is targeting a high that looks set to take the FTSE back above 5,000 towards my target of 5,100.

Without listing the usual detailed analysis i.e. trend analysis, macd, elliottwave and seasonals / cycles, I have summarised my outlook for the FTSE 100 trend in the below graph.

The Week ahead - UK Interest Rates

The Bank of England is expected to follow Wednesday's U.S. interest rate cut of 0.5% by cutting UK interest rates by 0.5% at next Thursday's MPC meeting, effectively having abandoned the targeting of inflation, as I said would occur over 6 months ago and have re-iterated on a monthly basis since. The inflation forecast for 2009 is due for completion this week, which will elaborate upon both the inflationary and deflationary trends that the UK economy is experiencing that result in a far more complex inflationary outlook than the Bank of England's stance of benign inflation going forward. Especially as the Bank of England has repeatedly failed to both control and forecast inflation accurately, which typically results in the repeated mantra of 2% inflation in 2 years time, the fact is that the Bank of England has only hit its CPI inflation target for 5 months out of 5 years, a success rate of just 8%, just as the BOE was forecasting today's inflation would be at 2%, 2 years ago instead of the actual rate of 5.2%.

The current UK interest rate forecast is for rates to be cut from 5% to 3.25% by September 2009. The only risk to the forecast trend is if the Bank of England cuts rates by 1% rather than 0.5% on Thursday in the face of an economy that is falling off the edge of a cliff; however I see this as a very low probability event.

U.S. Dollar Bull Market Update

The analysis of 26th October 2008, similarly called for a strong US Dollar trend into year end with recent price action supporting this view.

Charts Courtesy of Stockcharts.com

Gold looking to the long-term as the trend deteriorates

The existing analysis and forecast for Gold of 23rd September 2008, which reversed my earlier bearish stance that had been in force for 6 months, concluded with the expectations that Gold would exhibit a volatile up trend towards $1200 by March 2009. However the impact of a far stronger dollar and yen as the carry trade unwinds has hit Gold hard, knocking it below its subsequent support level of $820, which was soon followed by the even more significant break below $740.

This now puts the forecast in doubt, as turning to the long-term chart does not paint a bright picture. Therefore despite a short-term rally alluded to in my analysis of the US Dollar, the prospects for gold revisiting $1000 let alone rallying to $1200 are increasingly evaporating in the face of the changing long-term trend as exhibited by the price action and break of key support levels of $740 and $720.The only positive at this point is that bull market up trendline at $620 remains in tact therefore technically we are still in a bull market. The next support level below the bull market up trendline is all the way down at $500.

In conclusion the most probable outlook for gold at this point would be to trade in a range of between $930 and $700 into the second half of 2009, that does not preclude ultra-short-term panic driven spikes outside of this range.

For further ongoing analysis and forecast of the financial markets, economies, interest rates and the housing markets , subscribe to our always free newsletter to get the scheduled analysis and forecasts in your inbox on the day of publication.

Comments

[Hedged In:]

Isn't there an ETF for the FTSE 100?

2008 Nov 02 12:32 PM

[NutritionFacts:]

I've seen your stuff on marketoracle.co.uk. It's good stuff. Thanks.

2008 Nov 02 04:36 PM

[sorgmot:]

November 4, 2008

There is now a huge shortage of US $ currency as compared to the US $ IOU's that must be paid by those wishing to avoid bankruptcy, default, and loss of their assets in settlement of debts.

At present, the US $ prices of all assets are falling, and the US $ is rising relative to all assets, even gold.

In the near future decision makers will let their mortgaged assets go at whatever price they fetch. Creditors will take huge losses and the rich will no longer be rich.

Then the US $ price of gold will rise as the US $ will then fall relative to it as investors will look at the huge US Government IOU's relative to assets and the high unemployment rate in the USA and panic.

Good luck.

2008 Nov 04 08:38 AM