FTSE 100 holding firm above support but is summer weakness ahead?
While the FTSE 100 remains off its record highs from May, it continues to hold support.
FTSE 100 consolidating after strong start to the year
2024 began well for the FTSE 100. After languishing behind other global indices in 2023, the index was finally able to rally to a new record high, moving through 8000 and reaching 8500.
Top performers: Defence and Finance lead the way
The first half of 2024 saw significant shifts in the UK stock market, with aerospace and defence companies emerging as clear winners. Rolls-Royce led the FTSE 100 with an impressive 57.9% return, driven by the resurgence in international travel and increased defence spending. The company's success was emblematic of a broader trend benefiting defence firms like BAE Systems, as NATO members ramped up military budgets in response to geopolitical tensions.
The financial services sector also demonstrated strong performance. Companies such as Hargreaves Lansdown, NatWest, Barclays, Intermediate Capital, and Beazley all secured positions in the top 10 list for year-to-date returns. Hargreaves Lansdown, in particular, saw a significant boost following news of a potential buyout, providing a positive turn after years of challenging market conditions.
The laggards: consumer cyclicals and retailers
While some sectors thrived, others faced considerable challenges. Consumer cyclical stocks bore the brunt of ongoing cost of living concerns, with companies like Entain, Burberry, JD Sports Fashion, and Whitbread experiencing notable declines. These struggles reflected a broader trend of tightened consumer spending in the face of persistent inflation.
Ocado fails to deliver
The most dramatic downturn was experienced by Ocado, which saw its share price plummet by 58.9%, making it the worst-performing stock in the FTSE 100 for the period. This sharp decline led to Ocado's demotion from the prestigious index. The company's struggles were attributed to intensifying competition in the UK's grocery market and the ongoing impact of the cost-of-living crisis on consumer behaviour.
FTSE 100 still cheap
A key attraction of UK stocks over the past eight months has been their relative cheapness compared to other global stock markets. While the S&P 500 trades at around 24 times earnings, the FTSE 100, even after its strong gains this year, still only trades around 12 times earnings.
As a result, the index, and the companies in it, looks attractive to global investors who have been deterred by the higher valuations in the US. With this valuation gap still in place, we may see further gains for the FTSE 100 in the second half.
Seasonality – summer swoon ahead?
Despite its gains in the first half, the FTSE 100 may have a hurdle to navigate before a rally in the last months of the year.
As the seasonality chart below shows, the index has encountered declines throughout August and September, before beginning a rally from early October.
FTSE 100 seasonality chart
FTSE 100 price – technical analysis
The FTSE 100’s performance this year is a lesson in how markets do not trend 100% of the time.
The year began on a poor note, with the index dropping 5% in the first weeks of January, but it found a low mid-month, and this marked the beginning of a sustained recovery.
April and May saw the index leap higher, hitting a high near 8500 before beginning a steady decline. While the price remains below the 50-day simple moving average (SMA), currently 8269, it has held support around 8150 since late May.
As the above seasonality chart suggests, the index may break this support and head lower, should it follow the average performance of the past 25 years. In such a case, we may see the index head down towards 8000, with a much bigger pullback targeting the previous highs at 7760.
Should the index manage to break above trendline resistance from the May high, and move above the 50-day SMA, it will then test recent resistance around 8300. A close above this might mark the beginning of more sustained upside towards the May highs at 8500.
FTSE 100 chart
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