Market overview July 2005

Since footsie probed down towards 3250 in March 2003 there has been a clear and profitable uptrend, with gains in excess of 50% for those with the presence of mind to invest cash at those lows, and much more if you cherry-picked small caps at that time.  Such uptrends don’t go on forever, and it is useful to establish some signposts for the journey ahead.  The big question is whether the current uptrend is a new long term bull market, after falls in the region of 50% from 2000-2003? Or is this uptrend no more than a bear market rally in a secular downturn which has not yet finished?

Amidst the downturn from the peak in the year 2000, Footsie developed a strong band of support in the 5100-5400 range from October 2001 to May 2002, 7 months of very dull trading.  The recovery that began in March 2003 is now stalling in this range.  Footsie failed to breach and hold above 5100 in February, and has failed again over the last month.  To give confidence that this is a new bull market the index needs to breach and hold above 5400.  On the other hand a breach of 4300 would be very negative, and at this level it is fair to assume that recessionary fears will be growing.

The optimists amongst you probably feel that anything below 4800 is difficult to imagine.  But the chart shows quite clearly that even if we are in the first leg of a new long term bull market, support for the second, downward, leg is clearly towards 4300, and this would be the foundation for the third, upward and very dynamic, leg.  

These signposts are important because, however good your stockpicking skills, a footsie below 4300, a continuing bear market, and a domestic recession will make life very difficult.  If the last leg of the bear market is ahead of us, and the whole downturn takes a zig-zag shape, we should expect footsie to fall below the March 2003 level by a good margin.

There is no need to panic.  Just be aware, look out for the signposts, and decide now how you will respond (so you don’t get embroiled in an inevitably emotional decision at the time).  For balance, count the profits that you should have made over the last couple of years, and remember that no one ever got poor by taking a profit.