- Plunging pound has propelled index within 2.3% of new high
- Technical analyst says gauge will reach 7,300 in 2017
Gains that have lifted the FTSE 100 Index more than 8 percent since Britain voted to secede from the European Union show little sign of weakening and the stock gauge looks record-bound, according to an analyst who’s been accurate in past predictions.
Francis Hunt, who runs the technical analysis site themarketsniper.com and teaches courses on trading, says a chart pattern indicates the FTSE 100 is poised to surpass last year’s peak of 7,103.98 and may reach 7,300 in the second quarter of 2017. That would mean a continuation of the recent bullish trend that already made it one of the top performing developed-market gauges of 2016. The FTSE 100 advanced 0.3 percent at 8:48 a.m. in London.
With the index coming within 2.3 percent of an all-time high on Monday, some have started to question the durability of the rally, especially after the FTSE 100 hit a technical signal that indicates gains might have come too fast to hold. Its relative strength index jumped to 73 that day, the highest in three years, and then slipped below the overbought limit on Tuesday as the stock gauge halted an eight-day rising streak. To Hunt, worries about the sustainability of the U.K. equity rally are overdone.
“Do not be a shorter of the FTSE 100,” he said by phone from London. “This is a great time for those who wanted to load up on things like Vodafone or miners. You will rarely find a crash that happens where you haven’t had a relative strength index turn down, but many times when it turns down there are no crashes -- there are lots of wolf cries but no wolf.”
The FTSE 100, made up of multinational companies including commodity producers, lenders and drugmakers, has benefited from the dramatic plunge in the pound and increased stimulus from the Bank of England since the Brexit referendum. With most European national indexes still down for the year, the U.K. gauge stands out, up 10 percent.
Hunt, who issued a short call on Brent crude in the summer of 2014 and later that year predicted the euro-Swiss franc floor would fail in early 2015, says the FTSE 100 will surpass last year’s record, provided the pound stays low and commodities remain strong. He’s basing his analysis on a chart pattern known as inverse head and shoulders, which helps forecast the reversal of a longer-term bearish trend. The index has broken above its resistance level and should keep on climbing, though perhaps not in a straight line, he said.
Hunt’s bullish view contrasts with that of eight strategists surveyed by Bloomberg, all of whom predict the FTSE 100 will fall from current levels. The average estimate is for an 8.7 percent drop by the end of the year from the Wednesday close.
But even some of those forecasters -- including JPMorgan Chase & Co. and HSBC Holdings Plc -- are overweight the FTSE 100. The U.S. bank reiterated its stance on Monday, citing its high dividend yield, international exposure and low price-to-book valuation. The British firm has said the rating reflects its forecast that U.K. shares will decline less than European peers this year.
While the FTSE 100’s RSI dipped to 62 on Wednesday, investors shouldn’t be spooked by the slide below the key level of 70, according to Hunt. In January 2013, for example, it also crossed over that limit to subsequently dip back below it but kept on rallying until May of that year, when the equity gauge hit its highest level since 1999.
“Think of the FTSE 100 index level as the speed and the RSI as the acceleration,” he said. “Just because we are not accelerating as quickly anymore, doesn’t mean our speed is not incrementally going higher.”