Wednesday, 11 January 2012

Mike Lenhoff: Equities are overbought, so mind the consolidation.

Two of four technical indicators I look at for the UK equity market are now registering an overbought condition. The last time the market reached a similar condition on the same indicators was October 2011 when the FTSE 100 failed to get much past 5700. The area around this level might now be offering resistance. The trick as always is gauging the reaction. Does a major sell-off lie in store, a minor retreat or just a pause for breath? If there is a reaction, our sense is it will be the latter or nothing more than a shallow retreat and that the momentum that helped the FTSE 100 to climb some 16 percent from this past October’s low will resume. At least four features suggest this.

First, and without elaborating, the tone of the US news flow is indicative of an economy that is regaining momentum. An encouraging sign, among others, is the underlying trend towards improvement in the nonfarm private sector payrolls. Behind this lies the Fed’s commitment to keeping policy easy for some while. More >

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