Good morning. It started off fairly flat yesterday morning with a slow drift down to the pivot area at 6730 before a decent climb back to the 6765 area. Then the bears appeared virtually at the close, and took the FTSE all the way down to the bottom of the daily channels. Unfortunately yesterday’s shorting area at 6770/75 wasn’t quite reached. The US sold off quite sharply as fears rose over valuations, a fear that has led to a weak overnight Asia session. The bigger picture news mentioned below in the Bloomberg section fits in with my 2014 outlook which was for limited upside, possibly reaching 6850/950 before a significant fall to the 6000 area about mid-year. I agree that shares might have limited upside having had a good run in 2013, and I still think there are significant hurdles to overcome before the recovery is locked in. We are not there yet, in my opinion. The US earnings reports will make interesting viewing to see if that share price rally was justified, starting with JPMorgan today then more banks on the 16th.
Asia Overnight from Bloomberg
Asian stocks fell, with the regional benchmark index on course for its biggest loss in more than three months, as it paced the largest drop in U.S. stocks since November amid concern over valuations.
The MSCI Asia Pacific Index lost 1.4 percent to 138.77 as of 2:18 p.m. in Tokyo, heading for the biggest loss since Sept. 30. All 10 industry groups on the gauge fell, with more than three stocks dropping for each that rose.
“Investors are starting to ask the question that strategists and analysts have been asking since October: Has the optimism that drove 2013 translated into earnings?” Evan Lucas, Melbourne-based market strategist at IG Ltd., said in an e-mail. “The reaction from Wall Street overnight suggests some are finally asking this question for real.”
The Standard & Poor’s 500 Index lost 1.3 percent yesterday, the biggest loss since Nov. 7. Japan’s Topix (TPX) index slumped 2.3 percent today as the market reopened following a public holiday. Japan’s current-account deficit widened to a record in November as imports climbed, data showed today. The yen snapped a three-day gain after touching a three-week high against the dollar yesterday.
U.S. Futures
Futures on the Standard & Poor’s 500 Index were little changed today. The S&P 500 has dropped 1.6 percent in 2014, the worst start to a year since 2009, according to data compiled by Bloomberg.
U.S. stocks extended losses yesterday after Federal Reserve Bank of Atlanta President Dennis Lockhart said the U.S. economy is on “solid footing” and he would support continued cuts to stimulus. Lockhart doesn’t vote on policy in 2014. The Fed, which next meets Jan. 28-29, last month announced a reduction in its monthly bond-buying program, citing a recovery in the labor market.
The Asia-Pacific gauge traded at 13.2 times estimated earnings as of yesterday, compared with 15.4 for the S&P 500 and 13.9 for the Stoxx Europe 600 Index, according to data compiled by Bloomberg. The MSCI Asia Pacific gauge rose for 11 consecutive days through Dec. 31, while the S&P 500 index ended last year at a record high, having climbed 30 percent for its biggest annual rally since 1997.
“Shares rallied toward the end of last year without much of a correction and that makes me think the upside momentum for markets is limited this year,” said Kenichi Kubo, a senior fund manager at Tokio Marine Asset Management Co., which oversees about 5 trillion yen ($48 billion). “Judging from valuations, markets will struggle to rise further.”
FTSE Outlook
I don’t think we need to be quite as bearish as yesterday’s fall in the US would suggest and we are now testing the bottom of the daily Bianca channels. On the FTSE a dip below (and hold below) 6700 would turn the tide bearish, but it actually held up quite well last night while the Dow sold off. As such a knife catch at around the 6700 area with a long to hold for 6830 might actually come good! I have support at 6706 and 6696 so a stop on any longs at around 6676 should be ok, as that is just below the lower support level at 6679. Below that the bears will be targeting 6613.
So, cautious long at 6700, but if it breaks then I feel we are looking at a drop to nearer 6630. The reason I am thinking that this 6700 might hold for the moment is that we aren’t actually testing any of the Raff channel bottoms on FTSE, Dax or Dow. If that support does hold then today’s pivot at 6750 might get hit, especially if JP Morgans results are good later on. Dow is also nearing support at 16230/40.