FTSE100 Update - A stripped down look at lower highs being formed

So, after a few days of summer relief fear is back on the agenda today, the word Portugal being used a lot to describe the sell off. As we should know by now, when the market needs a reason for a sell off or profit taking it can usually find something. That's not to say that the wider macro issues are not important, but anyone following this blog will know by now that quite often the market turns a blind eye to news, good or bad, just as often as it will take it into account. Usually the news will serve its purpose, whatever the market sentiment is at the time. Often it is just plain old noise.

However, the charts are suggesting a sentiment change. The first of the two FTSE100 charts below is a stripped down version that shows that we seem to be in a wave down pattern. I'm not that proficient at Elliot waves or wave theory and whether they offer us a "scientific" approach to technical analysis, but anyone who looks at charts for any length of time cannot fail to see that markets and individual shares often move in waves, up and down. These waves will often have higher highs in an upward move and lower highs when falling.

The charts below are suggesting lower highs, the market unable or unwilling to sustain any bounce. A wave formation is also emerging that could see more downside as so far it looks like this is only the beginning of a third wave down. MACD also suggests that the daily chart is weakening to further downside. FTSE100 does have support levels below 6000. If the latest fall today continues watch out for what happens on the next bounce, as 6300 is the approximate lower high just achieved. Any bounce that does not clear that and sets another lower high suggests weakness and more downside.

The weekly and Monthly charts, not included here, also suggest weakness, although the latter still offers hope to bulls that the longer term upward trend is still in place.

It's also Summer, and markets can drift on low volume numbers.

For charts click below:

June, the numbers suggest not a good month for equities

Looking at the falls so far in June, especially deep in emerging markets, Japan, Europe and the UK, you would be forgiven for thinking that "Sell in May" is in full swing, but as usual it might not be as simple as that (sell in May, stock market myth or reality). Sell off for June may be more appropriate.

In the last 22 years the FTSE100 has fallen in June 73% of the time, the average performance being -1.4%.

http://www.cityindex.co.uk/market-analysis/trade-statistics/11787652013/ftse-june-infographic/

But as can be seen by some of the "Sell in May" stats, a bad June doesn't always follow through.

June does have a habit of being a bad month for equities though and this year after such an unrelenting bullish start to the year, the pace of which couldn't be maintained, there had to be a sell off at some point. It's almost as if the market was gearing itself up for a correction and June seems to be a good time for it.

The interesting thing about this sell off is that from a news standpoint we have not been going through a particularly bad period of news. If anything the news is mixed, not overly good or bad, but the market sentiment has changed in the last month, so that any good story is now largely ignored, or it's not good enough. Of course, when the market's going up any bad news story gets the same treatment, ignored. However, the "fear" word does appear to be back, even if the fears seem to be more imaginary than having any basis in fact.

I've long taken the view that the stock market is no more than a sentiment market, which will often use fundamentals, or the lack of, news - good or bad, to justify whatever the prevailing sentiment majority opinion in the market happens to be at that moment in time. I've never seen stock markets as particularly efficient either, they always seem to be too bullish or bearish, rarely is a happy medium ever achieved.

It is almost pointless trying to apply logical or rational thinking to why the market behaves the way it does, yet this is what investors are essentially trying to do when picking companies to invest in. We try to come up with systems, analysis, a way of doing things that will pick us a winner, yet the market itself is largely about sentiment. How to balance these? No easy answer to that one.

Sell in May? Stock market myth or reality?

When it comes to the stock market, the old adage Sell In May return on St Ledger's Day seems to be one of those beliefs that has stuck around and stood the test of time, at least in terms that many seem to take it for granted that it is true. It appears to be like one of those sayings in life that no one ever questions, investors and traders will often refer to the old "sell in May" without ever having looked into whether it is backed up by hard data.

How did the saying come about?

The origins of the phrase date from the time when the City was full of toffs who became more preoccupied with the social whirl in the summer – the Chelsea flower show, Wimbledon, Royal Henley, Royal Ascot, the Epsom Derby, Cowes (not necessarily in that order) , and finally the St Leger classic at Doncaster – than earning money in the stock market.

http://www.proactiveinvestors.co.uk/companies/news/56550/sell-in-may-regret-by-september--56550.html

So, to some degree the idea of selling in May and being out of the market for 3-4 months as a good strategy appears to be based on the notion that the market heavyweights are away during that time. In other words, most of those with money in the city are too busy on holiday spending it to be bothered with market matters. A little simplistic maybe, but that appears to be the general gist of the argument.

What does the data say?

Datastream provide historical financial data to the City and they have come up with a number of interesting truths about "Sell in May"when applied to the UK.

• In the 21 years prior to Big Bang 1986, the FTSE All Share index was higher by mid September in 15 of those years.
• In 1974 it would have worked well as the market fell 41.6% between May and September.
• In 1975 however, you would have missed out on a 107.4% increase between May and September.
• In just 14 of the 47 years since 1966 has the market been lower by mid September than in May.

http://www.proactiveinvestors.co.uk/companies/news/56550/sell-in-may-regret-by-september--56550.html

Evidence seems to suggest that when it comes to selling in May, anyone taking the advice is more likely to miss out on potential gains. If you are waiting for a market correction you have about a 1 in 3 chance that the market will be lower come September than now and the chances are that even if it is it's not likely to be at a crash level lower.

Perhaps this year will be different? After all, the market has had a pretty good run for the last 6 months without any significant correction. Also, the market might need a pause as we head into the end of year, which traditionally has been good for shares as we finish with the Santa rally. At some stage we are likely to see a correction, but data would suggest that we shouldn't count on the old "Sell in May" to provide it and maybe it is something that we should just forget about and ignore like an old wive's tale.