FTSE100 - another look at the monthly chart, 7000 on the cards?

It has been quite an amazing run since the new year, even more so when you consider that the markets had been going well as 2012 ended. In this post at the end of January I entertained the possibility that we would see 7000 at some stage this year, but I didn't think we would be getting over 6800 by mid to late May and within touching distance of 6900. Mind you, back in January I did say that the monthly chart almost looked too good and that continues, the chart is very bullish. Every minor dip has been bought and while we must assume that at some stage there will be a correction of sorts, there is very little for bears in this chart. Many who went short the FTSE, and other indices, because it looked too high or a correction must be just around the corner will have got their fingers burnt. They must be looking at a different chart to the ones I'm seeing as there have been few signals to go short.

One thought that has occurred to me is that as valuations become stretched as the market goes higher, it is just possible that in a low IR environment where there is little return to be had on cash in the bank, the markets might be just as happy with smaller returns in terms of dividend yield from companies going forward. Therefore, more racy valuations, which we are already starting to see on many stocks may become the new norm as chasing growth and momentum seems back in vogue, but the yield still beats cash on deposit.

The FTSE100 currently has an average dividend yield of 3% and a P/E over 17 and as the index goes higher yield goes lower and P/E's become more stretched. The markets are pricing in recovery, but at a time when you will struggle to get 1-2% on cash, a 3% yield with capital growth thrown in is very attractive. However, one has to wonder how much longer shares offering 4%+ yields will be available and as the bull continues how long will it be before the average FTSE yield is closer to 2% than 3%? Even if it gets to 2%, it beats cash in the bank, although capital risk is always higher with our cash in shares, except of course when the banking system itself faces collapse as it did in 2008. Any correction that does happen pushes up that yield, assuming companies continue to do well and there is no further economic tailwinds ahead. For now, the market seems content to accept a lower overall yield from equities it would seem.

FTSE100 - Monthly