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Market commentary February 2006

By February 1, 2006No Comments
From time to time we consider one basic, but effective, indicator to assess if the stockmarket is into dangerous territory. More on this below. P.S. Welcome if you are a new reader. P.P.S. ISA packs are going out in the next week. Do let us know if you don’t receive one or need additional applications.
Regular readers will recall that from time to time we consider one basic indicator to help figure if the stockmarket is yet into dangerous territory.  This indicator is how far the index is above the 200 day moving average.  In 1987 the index ran 20% above this moving average.  In less frenetic times alarm bells should start to ring once the index is 12-15% above the average.

At the moment the index is only 5% above the average, and in the bull run since March 2003 this figure has never been higher than 7.5%.  This is strange.  We live in a low inflation, low interest rate world, where there is a desperate search for income and positive returns, hence the rises in all asset classes, and giddy rises in some cases, ranging from index-linked gilts to gold (as we highlighted in previous commentaries).

In this environment why has the rise in the FTSE 100 index been so temperate?  It is possible to devote a small book to answering that one, but it suffices to say that footsie looks good value for some while yet.  On each retracement in this bull run the index has found strong support at or around the level of the 200 day moving average, now at 5400.

We would like to think that we are the first to spot the potential in the footsie, but the special situations-type funds have been moving heavily into this area for 6 months or so, even though the managers of these funds are usually much more comfortable hunting opportunities in the small and mid cap areas.  Their rationale was (and is) that as a domestic slowdown took hold, there would be more attractive opportunities in larger companies with a greater international exposure, with prices driven increasingly higher by aggressive takeovers.

Although the UK looks in good shape on this indicator, the same cannot be said for all world markets.  We always encourage well diversified portfolios, but you should not be over-exposed to some overseas markets right now. For example, the Japanese stockmarket index has recently been running 25% above the 200 day moving average, and this last happened in 1987.  Japan looks very interesting taking a longer view, but do try to avoid piling in after very sharp rises.

Dennehy Wealth