Mid-cap resurgence
While it's a bit annoying when our traditional tools no longer do the job, I can't get that worked up about it. The game may have changed, but the rules are easy enough to grasp. When the money is flowing, you buy. When the money stops flowing, you close your longs and maybe even go short. By the time you read this, we should have a better idea of how much longer the Federal Reserve will keep pumping freshly-minted cash into the financial markets, at least at the present rate.
I have no insight into the likely decision. Economists at Credit Suisse believe the Fed might cut back on its printing from September and end it in the second half of next year. I am sceptical that Wall Street's bull market will survive the end of quantitative easing, and maybe not even a lessening thereof. As I discussed in a recent fundamental report - http://bit.ly/15Mnuyk - valuations suggest that the S&P 500 faces a decade of potentially low returns.
Given the uncertainty over the Fed's decision, I have not yet joined the rally in stocks in the US and in Europe over the last few sessions. The gains have been pretty modest, which is always a warning sign to me that this may not be the real deal. Germany's DAX and our own FTSE 100 have been in downtrends on their swing-charts since late last week.
The FTSE's decline from its May highs was especially marked, with a fall of 9.7 per cent inside 15 sessions. According to David Schwartz, the stock market historian, there have been 35 episodes where the large-cap index dropped at least 7.5 per cent in 13 trading days. Twenty eight of those happened during bear markets, thus suggesting a four-fifths chance that we have now entered a bear market.
I am still of the view that the FTSE has merely experienced a healthy shakeout and will likely only suffer a bear market if the money taps are turned off or there is another shock from the eurozone. And, I am keen to reinvest my individual saving account (Isa) in the UK market once the next leg upwards is under way. As I explain in this recent report and video (http://bit.ly/13HdOiZ), the FTSE 250 would be my preferred investment - and trade - after the summer correction concludes.
FTSE correction
On the subject of the FTSE 100, I have had a couple of emails in recent days from readers whose trading account charting facility is showing a different 200-day average to the one I have mentioned as a target. First of all, I use the simple average, rather than the exponential version, as that is what most others use. Also, I calculate the average based on London hours cash prices, whereas spread-betting firms use round-the-clock futures prices, starting from Sunday night.
I would still be happiest if the FTSE dipped to or below the 200-day average - currently 6150 - and then rallied back hard through it. That would be a decent enough buying opportunity.
