In the world of technical analysis, there’s a favorite joke that never seems to lose its charm: “Charts are excellent for predicting the past.” It’s not just humorous; it’s also quite insightful. While financial markets strive for efficiency, they are not perfectly so, and this imperfection leaves behind discernible signals in the long-term data.
One simple proof of this concept lies in the upward trajectory of market indices, like the FTSE 100 over generations. This continuous climb is a reflection of progress, mirroring the unfolding narrative of our lives driven by technological improvement which underlines the enduring appeal of companies that drive that progress on the stock market. Even before the days of steam, new tech has always held a special place in the stock market’s heart.
When you scrutinize the FTSE 100, you’ll notice that it often provides a sneak peek into forthcoming events. Occasionally, those in the know tip you off, moving market prices before the news even reaches the broader public. You can see something is coming even if you’re well-versed in the intricacies of the financial world with its arbitrage strategies and hedging mechanisms.
Now, let’s take a closer look at the FTSE:
The story of Covid-19 is etched clearly in the FTSE 100 chart, but our primary concern is tomorrow. Something interesting seems to be afoot–observe the recent shift in behavior. It’s calmed down.
Here’s one way to break the performance of the FTSE 100 index down:
The trends are unmistakable but the wild volatility of the past couple of years has suddenly dissipated. Volatility, in essence, represents uncertainty, and this decline signifies an increase in certainty, bringing the market back to the noise levels that prevailed before the pandemic, back when government intervention sought to instill stability through liquidity operations.
If this trend persists, we can anticipate the FTSE 100’s resurgence to pre-pandemic levels, adjusted for inflation, which could be quite substantial. Believe it or not, inflation has only increased by a modest 11% since 2020 (a little chuckle there). Nonetheless, even this level of inflation would propel the FTSE close to the 9,000 level.
The road ahead, leading up to next May, appears promising. It will be intriguing to observe whether the heightened volatility of the past two years has truly subsided. If it has, my prognostication of several years of robust performance looks good.
When compared to U.S. and Germany, the U.K. market looks extremely cheap but, of course, it does not have to rise when the expensive markets can fall. However, it seems core to the U.S. and Germany to drive their economies by juicing the markets and there seems no end in sight of that. It will just take a shake up in the U.K. to see this set in motion. While this is not in the chart we can hope it might be on the cards.