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Mon May 11, 2009 5:18 pm Reply with quote
FTSE moves into overbought territory
By Graeme Dickson | 10:09:00 | 11 May 2009
The market certainly has legs on it. I cannot remember seeing the FTSE rally so strongly in such a concentrated period (it has gained about 26% since the FTSE bottomed on 6 March).
There is no doubt the index is moving into overbought territory: the FTSE 100 on the 14-day RSI (Relative Strength Index) measures at 74 and there looks to be a very clear obstacle for continuation of the uptrend at 4640-4700. The chat I have been hearing recently is that a significant number of fund managers that opted for a high percentage of cash when the FTSE went below 4,000 are underperforming their benchmark index by so much that they are keen to put their money at work so they can attempt to play ‘catch-up’. If this is true then it might not be a question of if the FTSE can break 4,700 by the end of the summer but when.
That said we are entering the period of ‘sell in May’ and with the FTSE having such an amazing run, there are bound to be some traders/investors looking to bank profits before they go on their holidays. Personally I am finding it difficult to go long on the market per se until we get closer to 4,000 and I would not be surprised if there are a number of market players hoping and expecting for the same outcome.
As for trade ideas, I have scanned the market for the highest RSI’s in the FTSE 350 universe (anything over 80) for stocks to potentially short when the market appears to have rolled over. This has thrown up a number of candidates: bear in mind there are some stocks I believe are too risky to short given recent positive newsflow. The high RSI stocks are: Heritage Oil (HOIL), Computacenter (CCC), Mondi (MNDI), Ferrexpo (FXPO), Pace Micro (PIC), SAB Miller (SAB), Close Brothers (CBG), BP BP (BP.), De La Rue (DLAR), Debenhams (DEB) and Northern Foods (NFDS). Out of this list I would avoid Heritage and Pace due to the positive noises coming from both companies although the prospects of shorting paper/packaging manufacturer Mondi look appealing if the stock can get closer towards 210-220p (stop at 230p and target of 161p).
There are very few candidates that have RSI’s below 30 in the FTSE 350 universe. The few that have include Salamander Energy (SMDR), Domino’s Pizza (DOM) and Drax (DRX). Salamander looks interesting at these levels with increasing oil production in South East Asia and a decent balance sheet to boot, the future looks good for 2009 as long as the oil price and equity markets hold. Tentative long positions should be considered at market with a stop loss at 154p and target of 229p. I’m not quite so convinced about Domino’s given its forecast earnings of 17 for 2009 and that there have been signs that growth is slowing after strong sales in January and February. Drax looks to be trading at the bottom end of its range (465p-550p) and is probably worth a long position with a stop loss at 449p and a target of 547p: hopefully the yield of 9 pct should attract income hunters to the company.
Stocks that might appeal to the momentum traders with RSI’s between 30-80 but have positive changes in the RSI over the last five trading days include Legal & General (LGEN), Spirent Communications (SPT), Micro Focus (MCRO), Kazakhmys (KAZ), Standard Chartered (STAN), Barratt Developments (BDEV), F&C Asset Management (FCAM) and Millennium & Copthorne Hotels (MLC). The appeal to these types of stocks is that the trend is clearly up yet they have not reached overbought territory according to the criteria selected.