I am writing this mid-way through December 2016 and it seems like we are just about to start the year-end rally. 2016 has been the year of stock market growth that no one saw, with a bearish press for most of the year. This is despite the scare mongering put out earlier in the year if Brexit came to fruition and Trump won the presidential election. I heard that if you put £5 on a bet that the UK would leave the EU, Trump would win the election and Leicester would win the Premier League in the 2015/2016 season you would have won around £5million! The US markets, FTSE and Dax have made new record highs this year, off the back of major macro events that didn’t turn out as anyone expected. By the time this is published we might well have seen a rally and I am expecting a year end FTSE close around 7000, which leads onto 2017…
The main big event (that is predictable anyway) is Donald Trumps inauguration as US President on the 21st January. So far markets have reacted favourably to his election win, helped by the rhetoric about really ramping up the infrastructure projects in the US during his term. We will then have French Presidential elections, the usual political turmoil around the world and probably a few natural disasters thrown in too. On the positive side, we will probably see politics changing with the electorate voting for more changes to the old order. That said, I think more people are going to feel the pinch a bit more as costs increase with rising inflation and static wage growth. That lack of desire to spend, as well as a slow down in big ticket purchases might see some deterioration of economic indicators.
In addition to that, the main concern for me is that loan-to-income ratios are starting to hit record highs, with homeowners amassing record levels of mortgage debt despite Bank of England restrictions aimed at limiting financial risks. The BoE has limited the number of loans that banks can make to home buyers who want a mortgage 4.5 times bigger than their incomes. But in response, banks are lending lots of mortgages just below that. A Bank of England study of the most indebted 50pc of borrowers found the average mortgage is 4.1 times a homeowner’s income, the highest level on record and up from 3.6 times in 2009. For me, this is more worrying going forward as it’s a repeat of the precursor to the 2008 financial crisis. As interest rates start to rise, more will feel the pinch and it was exactly this with the NINJA loans, and self certified mortgages that cause the house of cards to collapse the first time. Those who cannot remember the past are condemned to repeat it.
I can see a fairly bearish start to the year off the back of a strong close in 2016. The US markets have been pushing to new highs, though the FTSE has lagged considerably, since testing 7130 during October 2016. As you can see from the weekly chart below, the overall trend has been a bullish one, rising to where we are closing out the year.
For 2017 I am expecting it to be more bearish overall as the ramifications of Brexit and the Trump presidency start to filter through to real life. I also see a more unstable environment as a general mood of entrenchment proliferates for people, companies and countries. I think interest rate rises, particularly in the US will continue, and the average man on the street, in every country, is going to start to feel the pinch as their costs for everything increase and income stays the same. However, I don’t want to come across as an uber bear as I believe that dips are always worth buying. I can just see some more political upsets ahead, such as Le Pen winning the French Presidency and a general continuation of a rise against the establishment.
FTSE Technical Outlook
I can see a dip in Q1 and possibly Q2 down to the 6500 level where we have the 200ema on the weekly chart, before a climb back from there. I also have one of my custom signals showing weekly support around this area – the green line on the chart.
If that bounce fizzles out around the 6800 level then a drop back towards an even lower level looks likely, possibly 6000, maybe even 5500.
So a bearish start to the year. However, I don’t think its all doom and gloom from a technical perspective as if we do reach 6500 or 6000 and bounce well we could be on track for a bullish second half of the year, with the potential to reach 7200+. Looking at the Dow Jones, I wouldn’t be surprised to see 22000 during the course of 2017 which could well tally with a climb on the FTSE towards that 7200. Whilst these levels might sound rather fanciful at this stage of the game, if the weekly chart bullishness pans out and the dip to 6500 is bought up, its remains a distinct possibility.
So, that’s really what I am looking at for 2017 – a dip to 6500 and then a climb to new highs in the second part of the year. I wish you prosperous and happy trading for the next 12 months and you can always see my daily analysis posted on my website at www.hilsdentrading.com
We have included an Interactive Chart below so you can track how the FTSE is performing and even pop the chart out, use the drawing tools and Indicators to conduct your own analysis.