PLATO said: “A good decision is based on knowledge and not on numbers,” yet we are forever hearing about psychological barriers in financial markets.
One of the worst offenders is the 6,000 number on the FTSE 100. Friday saw the index close above it, so almost inevitably the City spent yesterday speculating on whether or not it could hold its ground. It turns out it couldn’t – the bankers and miners let it down, so it closed at 5,987. With at least nine bounces above the 6,000 line before the end of the day, the debate on whether it is in an up or down trend is raging.
The ever-exuberant David Buik of BGC Partners has been bullish on the FTSE for some time. In one of his recent emails he proclaimed that the FTSE could make it to 7,000 before 2011 is through.
He explains: “Equities are the only thing worth investing in at the moment and the companies [in the FTSE 100] are looking mean and lean.”
David Jones of IG Markets also thinks that the index has plenty of energy left: “There’s still momentum left over from the lows in July. My advice would be to buy in the dips for a rebound higher.”
But he warned that we should pay close attention to the FTSE beasts since they can have a disproportionate effect on the index. Mining and energy companies, for instance, can send tremors through share prices for months. Indeed, the market’s positive response to the BP-Rosneft deal, caused the FTSE morning rally yesterday morning.
Jones has his sights on BP as an index shifter. He believes it is still in a recovery phase and that its eventual rebound will push the FTSE higher.
Other movers are likely to be the FTSE’s big mining companies. A recent influx of cash from emerging markets and the commodities price boom could create share price shifting events. For good or ill, these mining companies’ money is likely to be spent on mergers, acquisitions or capital investment. Actions that will surely rattle the share price.
ETX Capital’s Manoj Ladwa is bearish: “The implementation of austerity measures, the VAT rise and the unemployment numbers all coming in the next few months are going to weigh down heavily on the FTSE. Perhaps not in this quarter, but I reckon it’ll push it to a healthier level – perhaps losing 10 per cent by the end of the year.”
With all these events to watch out for, traders need to be vigilant: the big companies have the potential to shove any trend off course. But for now, optimistic traders should go long and ignore that cursed 6,000 number. After all, if Buik is right, we might have to start worrying about the 7,000 level before long.