The FTSE has failed to complete the peak pattern I was looking for in my last post by staying below the 20 day moving average (20dma – the green line). Without the close above the 20dma which would have indicated a sharp drop was in the offing, I can only suggest further sideways movement is likely in the short term. The index regained 6,000 nearly three years ago now and the ten percent gain we have seen in that time represents pretty poor performance relative to the Dow which is up around thirty eight percent in the same period.
It is true that there has been more QE in the US, which drives up prices, and better economic growth, but things may be changing. Recent GDP and unemployment figures in the UK have been much better, so perhaps the FTSE may start catching up lost ground soon. Looking ahead I still think we could see strong gains on both sides of the Atlantic in the medium term with the final blow-off phase off this rally taking the FTSE to 8,500 and the Dow to over 20,000. That would probably put the cyclically adjusted price/earnings ratio (which measures share value against company profits) at around 30, which is the level seen prior to the 1929 crash. I feel that we are unlikely to re-attain the levels seen in the dot-com boom as there is too much fear, uncertainty and doubt (the FUD factor) concerning the debt crisis around at the moment. That could change though, as the old adage is true: “the market can stay irrational longer than you can stay solvent”.