This week the FTSE 100 and the S&P 500 made new all-time highs, the advance continues, stock markets are strong but the timing indicators are overbought. One market that has a big influence on the FTSE is GBP/USD. The two are negatively correlated which means when GBP/USD goes up the FTSE goes down (assuming no other factors influence the FTSE). Yet in the last three trading sessions both GBP/USD and the FTSE have gone up at the same time. This is unusual and a clear indication the FTSE is strong. One of the reasons why GBP/USD is rising is because Fed chair Janet Yellen was dovish on Wednesday after the release of the latest FOMC meeting minutes. US interest rates will go up but not as aggressively as previously thought.
Of course this is also bullish for the S&P 500, but the US index has been rising for many months, the rally is running out of steam. My timing indicator, Top 20 Differential, is overbought, an indication the blue chips have gone up too far, too fast. My directional indicator, BTI, is still bullish, so this is how I read the market: the trend is up but markets are overbought, this suggests the markets will pullback before moving higher.
If you follow my indicators on the chart below, you will notice that my trend reversal indicator (34-day BTI) is not yet overbought, this is why I believe markets will rally to new highs after the pullback and next time the trend reversal indicator becomes overbought it will be the end of the bull market. When this indicator is overbought it signals a major top. Supporting this view is an increase in takeover activity. Many blue chips like Unilever have been approached by predators, takeovers can happen at any time but when there is an increase in activity and the price tags become silly, you know the bull market is almost done. History tells us that some of the largest takeovers have occurred at market tops.
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