Stock Indices Performance week ending 23 May 2014

I thought it might be useful to see how two of the major indices have performed this week, and what contribution the underlying shares made. I'm talking about the FTSE 100 and the S&P 500.  The FTSE 100 is a good place to start.

FTSE 100 daily chart

 

This is the FTSE 100 at mid morning, and it looks as though the trading week will end on a low note. This week the market has been unable to sustain the record high that was hit on May 15 - it got to almost 6894.00 before dropping back again to close at 6840.00. The low so far today (Friday) is at 6793.00. Optimists still expect the index to break 7000.00 this year, and one commentator this morning thinks 8000.00 is a possibility. This is based on the fact that the FTSE 100 is undervalued compared to the S&P 500 in America (a good model for comparison as it is also weighted by market capitalization).

Activity this week has been driven by some significant ups and downs. On Tuesday Vodafone shares dropped 5.5% to 205.30 after the company announced an expected drop in earnings for 2015. And Marks and Spencer also took a drop of 1.1% on a warning that a new website driving merchandising would take up to six months to 'settle in'. That had a knock on effect on Tesco and Morrisons, who fell by 1.9% and 2.1% respectively. The index finished the day on 6802.00.

On Wednesday AstraZeneca shares rose 2.4% on the news that a successful bid from Pfizer might still be an option. As things stand today, the AstraZeneca directors have rejected the £55 per share offer, but Blackrock Asset Management and other major shareholders in AstraZeneca are pushing the board to consider re-opening talks in late August. AstraZeneca's chairman has said the board would consider an offer of £58.85 per share. So the chances of the takeover going ahead seem rather more feasible. The index closed at 6821.00, an improvement on Tuesday.

The day started well on Thursday, with a rise in tobacco stocks on the news that British American Tobacco was favourably disposed towards a merger between two other tobacco companies (Lorillard and Reynolds). BAT's shares went up 2.4%, and Imperial Tobacco climbed by 1.6%. Royal Mail, however, took a sharp plunge of 5.8%, and the index ended Thursday on 6820.00

Today the index dipped further (6805.00 as I write), some of which could be attributed to uncertainty over European election results, and the Ukraine Presidential election on Sunday.

The outlook for the FTSE 100 continues to be bullish. Factors that will influence its performance include an improving American economy, and China's ability to maintain steady growth. A poll conducted by Reuters last month of fund managers, analysts and traders concluded that the index will break 7000.00 points by the end of the year. The reasoning behind this optimism is based on the UK's continued economic growth and a corresponding improvement in company fundamentals. What is interesting is the fact that the S&P 500 and the FTSE 100 have recently both reached record highs, which arguably demonstrates how closely the US and UK markets are entwined.

Looking now across the pond at the American S&P 500 Index. For those of you not so familiar with this index, it's made up of 500 large US companies by market capitalization, a full list of which you can find here:   http://us.spindices.com/indices/equity/sp-500.

To give you some indication of the mix, I've included a breakdown by sector below.

S&P 500 Index by Sector

 

Like the FTSE 100, the S&P 500 recently made a record high on May 13, breaking through 1900.00. It subsequently dropped down again in the next two days to around 1864.00, but is regaining upward momentum.

Monday saw it build up a head of steam, consolidating the gains of Friday. Stocks such as TripAdvisor jumped 5.2%, Netflix went up 4.2%, and Vertex Pharma was up 3.4%. There is continued volatility around technology and biotech stocks. Their prices seem to rise in line with good economic data, but can be moderated by the perception that they may be overvalued.

Tuesday brought us back into the red zone, with a decline by stocks in the retail sector. These included TJX Cos with a 7.6% drop, and Staples at 12.6%. This had a knock on effect on other retailers such as Best Buy, which lost 5.6%. The index ended the day at 1872.00.

Wednesday brought a bounce back with the news that the Federal Reserve have not yet decided to raise interest rates, which confirmed to the market that the economy is growing, but is not yet strong enough to support an interest rate rise. Today retail stocks jumped up, with jeweller Tiffany and Co experiencing a 9.1% rise. The index closed at 1888.00.

Thursday saw biotech rises again, with Vertex gaining another 6%, along with Alexion Pharmaceuticals at 2.5%. The market retained confidence on the back of Wednesday's Federal Reserve announcement, and also some positive Chinese economic news (Purchasing Manager's Index up to a 5 month high). This drove the index to a close of 1892.00.

The chart below gives you an idea of daily direction since December 2013. Note that the last green bar is yesterday's, May 22. 

 At the time of writing today (Friday), the index was at 1895.00. There is some New Home Sales data due out later today, but otherwise not much trading volume is expected today. There is a long weekend coming up, with Memorial Day on Monday.

The consensus for the S&P 500 longer term is bullish, with many analysts predicting a figure as high as 1955.00. Others are talking about a sharp downturn at some point in the year, but exactly when is uncertain. What seems possible in the shorter timeframe is that it will break through 1900.00, which is a key level of resistance that could fuel further gains.  

Darren Winters