FTSE 100 Is Now Fairly Valued

2016-02-17 10:45:00

Alejandro Zambrano, Market Analyst

Talking Points

FTSE 100 gains may be tempered going forward as the FTSE 100 is trading in line with the Bloomberg Commodity index and DAX 30.
However, as long as it trades above yesterday’s low of 5802 we stay true to the trend and the FTSE may reach 6000.
Today, U.S. Industrial production will give us insights into whether U.S. economic growth picked up in 2016, while traders will likely want to see dovish FOMC minutes this evening to allow corporate earnings to pick up.

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The FTSE 100 has now reached the February 4 high of 5945, which also was our target on a break to the 5880 high. Today, the index has been lifted by strong gains in the Technology, Communications and Financials Sectors. The biggest of the gains seen today, adding 4 index points, is Glencore PLC, followed by Vodafone PLC which added 3.67 points to the FTSE. The biggest laggard is National Grid (-0.83 index points).

FTSE 100 Is Now Fairly Valued

The FTSE 100 is now trading in line with the Bloomberg Commodity Index which suggests it should be trading at 5948, while the FTSE’s correlation to the DAX 30 suggests it should be trading at 5860 and is therefore slightly overbought. This suggests that FTSE 100 gains will be tempered and limited going forward unless its drivers are seen again, something I do not expect to occur at this time given that the Bloomberg Commodity Index is trading sideways and the DAX 30 is remaining long term bearish below 9934.

Staying True To The Bullish Trend

However, price momentum is strong and as long as the FTSE 100 trades above yesterday’s low of 5802, we may reach the psychological level of 6000. Traders will most likely use a pullback to the 5880 level as an opportunity to add to their bullish exposure, while a break to yesterday’s low of 5802 may trigger a trend reversal and a decline to the 5700 level.

Insights into U.S. First Quarter GDP, FOMC Minutes

Today, U.S. Industrial Production for January is on tap and will help the market gauge if the economy is picking up or not. A Bloomberg News Poll projects a rise of 0.4% MoM, from negative 0.4% in December. A stronger than expected reading will probably keep the FTSE 100 trend intact, while a soft reading will probably dent the uptrend long enough to trigger a full-blown reversal tomorrow morning.

Later on in the evening the Federal Reserve releases its FOMC minutes from January’s meeting. Traders would ideally like to see hints of no further rates hikes in 2016 to allow corporate earnings to gain. If not, then the FTSE 100 may resume its overall bearish trend.

FTSE 100 | FXCM: UK100