From Capital & Conflict (GREAT BRITAIN) –
A reader asked an important question this week about the long-term “death cross” formation on the S&P 500.
The death cross is on the S&P 500. That’s America. This is Britain. What about the FTSE 100?
Fair point. I give you the FTSE 100 death cross below. Behold. Fear. Tremble. Discuss. Read on.
It’s not a lot different than the S&P chart over the same time period. The 50-week moving average crossed the 100-week moving average in 2001 and 2008. Both signalled steep corrections in the index. Both happened during steep downturns in the global economy.
There was a “false” signal in 2012. Grexit was averted, as was the possibility of a eurozone break up right then and there (as opposed to an EU breakup here and now). The index trundled higher as growth beat value and the banks recovered, and quantitative easing and low rates worked their inflationary magic on asset prices.
And now? Well that’s what everyone wants to know. What now? The chart shows the FTSE 100 death cross took place late last year. Since then, the index has traded below the 50-week moving average. But lately it rallied to the MA only to be rejected. What’s the chart telling you?
As I’ve said before, I’m no trader. But there’s a certain cyclicality to the chart that’s alluring, isn’t there? Credit runs in cycles. So does human psychology. People go from being over confident to overly fearful. Right now, the only thing certain is uncertainty.
It’s often said that markets hate uncertainty. But uncertainty is the default state in life. It’s too easy to say investors are skittish because they don’t know what the future holds. We never know what the future holds (except death and taxes). Why is it different this time?
It’s not different this time, except maybe in one respect. Instead of a general uncertainty about the future (life) there is a specific uncertainty (Brexit). As much as the chancellor would like to quantify the cost of Brexit (in jobs, shoes and the price of crisps), all we really know about it is when the vote is. It’s on 23 June.
We know there will be a vote. But we don’t know the outcome. And we don’t know if it will even be definitive. If it’s a “leave” vote, you’ll get more uncertainty for longer as Prime Minister Boris Johnson negotiates the UK’s withdrawal from the union. If it’s a “remain” vote, you’ll get years of uncertainty about what the cost of remaining in the sclerotic, bullying EU is. Misery.
But enough about what we don’t know. Let’s ask someone who knows about stocks. Let’s ask The Fleet Street Letter investment director Charlie Morris. I showed Charlie the FTSE 100 death cross chart this morning. He replied (more or less verbatim):
The FTSE trades like the rest of the world. The rest of the world has already rolled over. Commodities… emerging markets… growth. The S&P is the last one. And it hasn’t rolled over yet. That’s the one that matters… if it does… value could go down. But it will go down less than growth. And value always does better after the bear… the FTSE isn’t saying anything about Brexit. The pound is doing all the talking on that.