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Mean-Reverting at Current Range as Fundamentals Play Out


Key Talking Points:

  • FTSE 100 remains anchored around the 61.8% Fibonacci
  • Increasing inflation expectations and low real yields offer risk-on conditions
  • Covid-19 continues to pose a significant risk

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The FTSE 100 hasn’t moved much in the last 5 trading sessions, sticking to a tight range between 6,570 and 6,460 as fundamental factors unfold.

FTSE 100 Daily chart

FTSE 100 Forecast: Mean-Reverting at Current Range as Fundamentals Play Out

On the one hand, a risk-on mentality has returned to markets as inflation expectations rise rapidly whilst real yields remain mostly unchanged, creating the perfect environment for investors to assume that stocks and non-yielding assets will outperform safe-havens as the Fed allows inflation to overshoot 2% in the medium-term.

This positive sentiment is also supported by the expectations that the current rate of vaccination in the country could see lockdown measures relaxed greatly in time for Easter, meaning that the summer season could see a rebound in economic activity. The United Kingdom is the country in Europe with the highest rate of vaccination at present, with an estimated 18% of the population already having received at least one dose, ahead of the United States which is at 12.4%, and the average for the European Union at 3.7%.

FTSE 100 Forecast: Mean-Reverting at Current Range as Fundamentals Play Out

Source: ourworldindata.org

On the other hand, excessive valuations are a cause of concern for some investors as overbought conditions are still strong. The fact that Covid-19 has been around for a year and we have had many outbreaks in its course, there are still some who are wary that we’ll see normalcy in the next few years, even with the vaccine in play, and therefore current prices do not reflect the reality of the underlying economies and future expectations.

Technical analysis: the FTSE 100 is starting to look vulnerable around current levels as bullish momentum has been unable to push the index higher. The fact that price is consolidating around the 61.8% (6,489) Fibonacci (draws more attention to the importance of Fibonaccis in the recovery of the FTSE 100 since the lows seen last March. I have been mentioning these levels for some time now, and 6,500 seems to be the mean-reversion level for the current range, as indicated by the Bollinger bands.

The stochastic oscillator is currently approaching the middle line of 50, whilst the MACD is reversing the negative inclination as both of its lines are converging. This is likely to be showing indecision in the market with a lack of direction in the short-term, meaning that prices could remain around current levels in the next few sessions. In the case of a move to the upside, the 50-day SMA seems pretty convincing as a short-term resistance at 6,605, whilst the 100-day SMA is in a good place to offer support at 6,370.

of clients are net long.

of clients are net short.

Change in Longs Shorts OI
Daily -1% -1% -1%
Weekly 4% 6% 5%

Learn more about the stock market basics here or download our free trading guides.

— Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin

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