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In the middle of May, the Relative Strength Index (RSI) was overbought from a monthly, weekly and daily perspective. This is not a signal in itself to sell, or indeed place a short trade, but it does tend to prompt caution.
The FTSE 100, for example, sold off. It fell from the highs of 6870 to just below the pivotal 6400 level over a 15-day period, proving the adage that bulls climb the stairs and bears jump out of the window; it took the index twice as long to climb to that area.
After over 20% was added since mid-November of last year, many called for a correction in the early part of this year. The notion that you ‘can’t fight the Fed’ was enough to keep the market on the front foot, ensuring that most pull-backs were very shallow and regarded as an invitation to buy the dips.
We have tried to disassociate the stock market from the underlying economy, and it has worked to a point. The market is a discounting mechanism: it already knows that Europe is in recession and that growth and therefore demand in Asia is at low ebb. Even from a fundamental perspective, with the UK benchmark so heavily weighted towards the mining sector and the less-than-stellar data from China, profits must sometimes be taken.