FTSE 100 forecast for January

The UK general election is now settled and the technicals look positive. Will the index continue to rally in January?


FTSE 100 forecast suggests the index should continue to rally now that a partial cloud has been lifted in the wake of the recent general elections. The specter of uncertainty has weighed on the FTSE 100 for years, which now could see some outperformance relative to the S&P 500 index.

Historically, January has been a mixed month for the FTSE rising approximately 60 per cent over the past 15 years, with average gains that are slightly negative. Strong job growth and low interest rates present a Goldilocks environment for riskier UK assets. The technicals are pointing to higher levels for the FTSE 100, which are poised to test all-time highs.

Do these factors point to a positive FTSE 100 forecast for January?

What is in store for Brexit?

In December the Conservatives notched up a strong victory but their increase in the majority does not necessarily mean that Brexit will be a hard one. With a solid majority of 76, the Conservatives will not be hostage to the Brexit-hardliners which means they will likely be able to negotiate a deal that is moderate. The transition phase for Brexit is scheduled to end in December 2020, which is a short timeline. If the Conservatives are unable to seal a deal, they will be forced to fall back on WTO rules, if a deal is not extended.

The wild card in this process may be none other than Prime Minister Johnson. He is steadfast in his victory and seeking to embody in UK law that the trade negotiations with the EU will not extend past the end of next year. A standstill agreement runs through next year as the new relationship is negotiated.

The SNP won 48 seats in the general election compared to their 35 in 2017. SNP leader Nicola Sturgeon stated that Scotland has now had the mandate to push for another independence referendum. The landslide victory pits the SNP against a Conservative majority government that has promised to reject a second referendum no matter the result of the 2021 Scottish parliament elections.

Jobs data is strong

UK jobs data remains robust leaving future rate cuts in doubt. UK unemployment declined to 3.8 per cent during the three months to the end of October, according to the Office for National Statistics. Expectations were for the unemployment rate to remain unchanged at 3.9 per cent. This occurred as overall employment grew by 24,000 during the period, faster than the 14,000 expansion expected.

While unemployment remains low, wages are not rising. Average weekly earnings grew at an annualised pace of 3.2 per cent when bonuses are included in the measurement and 3.5 per cent for regular pay. However, expectations were for wages to increase by 3.4 per cent when bonuses are included. These numbers represent a Goldilocks environment where the economy is robust but rates are likely to remain low.

FTSE 100 analysis: the index is undervalued relative to the US benchmark

The FTSE 100 has underperformed the S&P 500 index by 250 per cent since 1995. The FTSE 100 also underperformed the S&P 500 index by 11 per cent in 2019. The trend has been downward sloping and could reverse on a well-negotiated Brexit as investors look for undervalued opportunities outside the United States.

The valuation is calculated by dividing the FTSE 100 by the S&P 500 index. The monthly chart of the ratio is oversold. The fast stochastics, which is a momentum oscillator, has declined to historic lows. The current reading on the fast stochastic for the ratio between the FTSE 100 and the S&P 500 index is printing near 6, well below the oversold trigger level of 20 which could foreshadow a correction. A correction in the ratio of the FTSE 100 relative to the S&P 500 index would mean that the FTSE 100 is outperforming the S&P 500 index.

FTSE 100 technical analysis

While the seasonals show that the FTSE only rallies 60 per cent of the time in January, the price action is pointing to a weekly breakout. The FTSE is fast approaching a downward sloping weekly trend line that comes in near 7,675 which is seen as resistance. Weekly support on the FTSE 100 index is seen near the 10-day moving average at 7,320 and then the 50-day moving average at 7,280.

Medium-term momentum has turned positive as the MACD (moving average convergence divergence) index generated a crossover buy signal. This occurs as the MACD line (the 12-week moving average minus the 26-week moving average) crosses above the MACD signal line (the 9-week moving average of the MACD line). The MACD histogram is printing in the black with an upward sloping trajectory which points to higher prices. Short-term momentum has also turned positive as the fast stochastic generated a weekly crossover buy signal.

FTSE 100 prediction: take away

According to the FTSE 100 forecast, the general election is now settled and a Brexit negotiation could lift the cloud that has covered the index for several years. Returns on the FTSE have been mixed in January, but the technicals look positive. Momentum is moving higher, and the FTSE is poised for a weekly breakout. Investors will be eyeing the FTSE as it has underperformed the S&P 500 index and could play catch up in January.

FURTHER READING: New Conservative Brexit pledge dampens excitement

FURTHER READING: ELECTION LIVE: Pound and FTSE 100 surge as Conservatives sweep to general election landslide

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