Broad Oak: your emotional support animal

Monday, October 06, 2008

FTSE and Dow predictions revisited

The FTSE is standing (if that's the right word) at 4,732 (13:50 BST, 08:50 ET). It seems to be edging towards the region I guessed at on 26 June this year. It had closed the day before at 5,666.10 and I said this:

I suggested on Wednesday that the market may already have lost much of its bubble, considered in real terms, and here below is my simple attempt at chartism.

What I've done is to draw two purple lines, one connecting the lows in the mid-80s/early 90s, and the other the highs in the same period. I've chosen that time-frame because it's before the silliness of the late 90s, and it does also include a period when the UK economy was in the doldrums.

Using these parameters, the late 90s and early 00s were well above trend, whereas last year's highs only just peeped above the upper line and the current value is hovering a little above the centre of the hi-lo wedge.

The implications are that the next low, if it comes soon, shouldn't be worse than around 4,500, and by 2010 (when I'm guessing the tide will turn) the bracket would be in the 4,700 - 7,000 bracket, with a midpoint of c. 5,850.

Taking the market at close yesterday and extrapolating to that 5,850 midpoint, would imply a future return (ignoring dividends) over the next 16 months, of c. 2.5% p.a. - not nearly as good as cash, especially in an ISA. On the same assumptions, to achieve an ex-dividend return of 6% p.a. would require entry into the market at c. 5,400.

On this tentative line of reasoning, we should be looking for a re-entry opportunity somewhere in the 4,500 - 5,400 level, say 5,000. Shall we wait for the next shoe to drop?

How bearish are you? Too much so? See the poll in the sidebar.

By the way, I did a similar exercise for the Dow the next day and it suggested to me that the range should be 7,000 - 10,000.

UPDATE

I'm in good company:

Mr Lenhoff [chief strategist at Brewin Dolphin] predicted that the FTSE 100 could settle between 4,500 and 4,600: "In this bearish phase the market has given up more than 50pc of the bull market gain, we are back where we were in early 2004. One of the key retraceable levels is thought to be two-thirds of a bull-market gain, which would be between 4,500 and 4,600. The market looks like it wants to give up the gain."

9 comments:

pej said...

Hi Sackerson,
I do not target specifically the FTSE, but my opinion is that we are going way much more south. I give the details here: Are we done yet? Expect a lot more

AntiCitizenOne said...

I personally think that predicting the future based on a linear extrapolation is a bit simplistic.

I also guess lower than 4500.

Sackerson said...

Thanks, Pej; definitely simplistic, ACO (though the complexity of the quants is hardly better, it seems). Now to see how wrong I may be.

pej said...

Hi Sackerson,
My point is not simplistic, it's simple and straightforward. My belief is that if you need quant to perform some calculation to the 6th decimal to understand if you are going to make money on a trade, it means that you are deemed to fail and doomed :-)
Do you think that Soros or Rogers have a team full of quants? :-)

Old Prof said...

Soros and Rogers do have those kind of 'quants'. However, they also have enough wealth to influence the market directly, as well as by consumer confidence.

Sackerson said...

Pej, I didn't mean you were being simplistic, my line-drawing was. And I agree that a more cautious, common-sense approach wins out over the excitable short-termers - except for the lucky few who got out in time after a working lifetime spent in mad gambling.

Prof - that's a worrying aspect, too, how investor-magnates can skew the market. Another one for the free marketeers to chew on.

James Higham said...

Let's wait and see if it does re-enter there and stay there.

Geethu Xavier said...

Please give me the forecast value of ftse100 on 6th may

Sackerson said...

Geethu: 7th May, surely! But I think the major reaction will come when the new government starts to make clear its policies.

There's an old saying in finance (apparently): never give a forecast and a time frame together. But I wouldn't be alone in suggesting that the FTSE could halve (in real terms) at some point.