Good buying in the FTSE 100

Despite concerns that there is going to be a difficult period of negotiations between the newly formed Greek coalition and its European creditors, European and UK equity markets look resilient.

Pound
Source: Bloomberg

It is my base case that we are set for a period of outperformance from the European markets (I’ve included the FTSE 100 here) relative to that of the S&P 500, after the European Central Bank announced its €60 billion a month in asset purchases last week.  Given the lack of alternative options, there is a high probability that a lot of the excess liquidity will feed into the equity market in search of yield.

Greece faces a funding issue, and with government debt at 177% of GDP it seems inevitable that we will have to see some compromising on its debt burden. Most in the market expect the Greek government to relax its hard-line stance with Europe and look at coming to the negotiating table with calmer heads. Recall that Greece still needs to find €28 billion in funding over the next two years, with €4.3 billion due in March and another €6.5 billion in July and August. A failure to find funding from its European creditors will see the country effectively run out of cash and a painful default would ensue. It has a lot to lose from this; while the Greek people have voted against austerity, the vast majority wants to stay within the monetary union.

It’s interesting to see good buying also come into the FTSE 100, and presumably traders are seeing the political issues contained to Greece. As you can see from the daily chart, the UK equity market is testing 6900, which has been the level by which good supply has come into the market over the last couple of years.

If we look at the oscillators, we can see the RSIs are elevated, but are by no means at extremes, however we are seeing stochastic momentum start to turn, which suggest some degree of caution. Given the significance of the levels the index is testing, my preference is to buy the break (on a closing basis), as this would provide some degree of confidence that the bulls are in charge. One would also be trading in-line with the prevailing trend.

Market internals are at an interesting juncture as well. 81% of companies are trading above their 50-day moving average, which is approaching levels where we have seen the FTSE top out, however we need to be much more concerned around the 90% level. There is room for the market to squeeze higher, but for now a cautious, but optimistic stance is warranted.  

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