Time to get defensive

In terms of the FTSE 100, the 6660 level has been a bridge too far. We haven’t managed a weekly close above it since May.

There has been a stealthy decline, with the FTSE 100 hanging onto the 6400 level by a mere fingernail. At this point, with the mining sector heavily underperforming due to supply gluts and less-than-stellar data from China, I think it’s safe to say that unless demand from Asia picks up, a continued decline from those 6660 levels is likely. A fall below 6400 ultimately brings about a more sudden departure from the uptrend that has been in situ since November last year.

If we examine the US ‘recovery‘, where we have seen the consumer discretionary sector outperform consumer staples, much of this can be down to auto sales, which have done exceedingly well recently, albeit from a low base.

Generally, it is a bullish sign to see the ratio in favour of discretionary items. However, if we look at the US 30-year bond versus the S&P industrial metals sector, there is a big divergence. The uncertainty from the debt ceiling and the current complacency in the markets is something I find rather difficult to understand. I feel we hit a top in the Dow Jones recently, and despite the slow, steady move to the downside there is more to come.

There will be opportunity, but I would be inclined to take a long-term view on it. Certainly to take advantage of the mining sector will need a distant perspective. So, with that in mind, I’d look to the likes of Anglo American – a palladium producer which gives exposure to the rising auto sales segment.

Discretionary-staple ratio chart

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