Is the FTSE 100 at risk of topping out?

Is the FTSE 100’s rise to record highs sustainable?

Last Friday the FTSE 100 made a new all-time high, marginally above the 7,900 mark and just above its May 2018 peak, benefitting from a weaker British pound, its favourable sectoral composition and on hopes that the Bank of England (BoE) might slow down its rate hike cycle now that it has reached the 4% mark.

On Monday, however, the index rapidly came off its record high as investors reassessed their outlook in view of much better-than-expected US unemployment data and due to heightened US-China tensions with the US having shot down a Chinese weather (or, according to the US, spy) balloon.

The fact that the pound slid by over 25% versus the US dollar over the past couple of years, and thus benefited many FTSE 100 companies which make the bulk of their profits in other currencies, combined with the FTSE 100’s large proportion of energy and mining stocks, led to the index’s rise by 0.9% in 2022 while other global major indices fell by around 20%.

Year-to-date only the German Dax 40 has last week also managed to be back in positive territory, having seen a stellar 7.5% rally in January.

Year-to-date performance of major European and US stock indices

Can the FTSE 100’s outperformance last?

Friday’s much stronger-than-expected US employment data, which showed that payrolls increased by 517,000 for January, almost tripling the consensus forecast, and at 3.4%, the lowest unemployment rate for 53 years, have thrown a spanner in the works of the FTSE 100’s rally to new all-time highs, as this data point to further hawkish monetary policy by the US Federal Reserve (Fed).

Added to that, rapidly falling energy prices, together with the over 20% recovery in the pound and a probable UK recession may soon negatively impact the FTSE 100’s performance.

FTSE 100 technical outlook

Friday’s FTSE 100 record high has been accompanied by negative divergence on the daily Relative Strength Index (RSI) which, by making a lower high, is pointing to weakness in the current uptrend.

A fall through Monday’s low at 7,807 would confirm a minor top at the very least and could lead to a slide back towards the late January low and the October-to-February uptrend line at 7,708 to 7,705 ensuing.

FTSE 100 Daily Chart

A daily, and more importantly a weekly, chart close below the 7,705 level would mean that a medium-term top, lasting several days and perhaps weeks, may be formed which may take the index all the way back down towards the December and January lows as well as the 200-day simple moving average (SMA) at 7,412 to 7,296.

Strong resistance can be found between the December and January highs at 7,876 to 7,913. While it caps, the risk of a slide being seen, remains in play.

Were a daily chart close above the FTSE 100’s all-time high to be made, though, the psychological 8,000 mark would be in the limelight.