Banks and the Dollar

There is no need to be bullish unless you are a short term trader. The FTSE 100 may well climb past 5400 but early next year the trend will change, we could be near the start of a major correction.

Two markets that have helped the FTSE 100 rally from the March lows, the bank index and the dollar, are no longer behaving as expected, see chart.

The dollar has been too low for too long. Note the inverse correllation between the dollar and the FTSE 100 since march. The dollar turned down in early March and has been going down until early December. The sharp rally in the dollar should coincide with a turn down in stocks.

With regards to bank stocks, the correlation has been positive since March but take a look at the chart of the Bank index and you will note that banks made their highs in September while the FTSE 100 continued to make new highs after September. The relative strength line has been declining since August, an indication that bank stocks are no longer fuelling the FTSE 100 rally.

These events are major bearish developments but we may have to wait until January before the next bear market begins as in the short term the FTSE 100 could rally to new highs.

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