The UK stock market is on the very brink of a major correction.
Charts aren’t destiny but the are a clear indicator of the past and in the recent past of the UK FTSE has started to look very bearish indeed.
Tomorrow is not meant to be linked to today, but its hard to see the FTSE chart and not see a break down. What is worse this fall is a silent one with little note of what looks like the beginning of what could be a very nasty correction.
The UK is not the only European market suffering from a bearish trend but nowhere is it as clear as in London.
Here is a chart of DAX and FTSE together and the picture is not so clear. On the FTSE 100 chart the new bearish move is clear.
The US markets meanwhile power ahead. So what is causing this bearishness outside of the US?
Trump’s ‘war on trade’ is likely key to this downward trend and the UK has Brexit to contend with as well.
Brexit is reminiscent of a famous alleged interchange between Winston Churchill and Nancy Astor. Nancy Astor is reported to have said, “If I was your wife I’d put poison in your tea.” Churchill is reputed to have replied, “if you were my wife I’d happily drink it.”
The UK is drinking the Brexit poison and the economic horror of that is dawning to the markets as the moment of truth approaches.
Unlike the US with its QE on/off lever to moderate market reactions, the UK seems to have no such device to moderate market swings nor does it seem to want one.
Outside of the European QE environment, the UK has its own rising interest rate dynamic with the UK, like emerging markets, vulnerable to the drying up of global liquidity just like other smaller economies.
Brexit, US reverse-QE, Trump’s ‘war on trade’ seem likely to be the root cause of this bearish environment.
Unless something turns this situation around this emerging trend could lead to a correction or even crash in the UK market.
Here are some scenarios.
This is what a crash could look like:
It doesn’t take a Jerimiah to see this:
They key point however is that the FTSE is in a sharp bearish move and it could be the start of something much nastier than a couple of weeks of poor market sentiment.
The old world of low volatility trending ended at the beginning of the year and we are likely in a new environment of sharp corrections and rallies in markets as easy money and liquidity searching for carry trades dries up.
A tighter money environment is going to be difficult for equities and now that economies are aiming to return to the pre 2008 norm of tighter money the market is regaining volatility.
The FTSE has been a major underperformer since 2000 when compared to US and Germany, running with the French CAC as laggard.
Now the FTSE stands on the brink of a nasty fall. The weakest mainstream market in Europe and US, it may well be that the FTSE is a leading indicator of trouble ahead. The coming weeks will show whether this pull back was a pothole on the road ahead or the first sign of a bear market ahead that many have been predicting in these highly valued markets. If the FTSE Canary falls off its perch it may well be time to move gracefully towards the exit.
Its not a hard call to make. If the FTSE breaks into new lows from here, it will be very bearish for the FTSE. Then will be the time to keep a close eye at the big picture and hope its not the start of something much bigger.