Footsie Fortunes

THE FTSE 100 index was shadowed by the gains of the FTSE 250 index in 2003. What can we expect for 2004?

The UK indices may well be due a pull back. However, it always worries me when everybody seems to be expecting one - it seems the market participants, retail and professional alike, are always very bearish when we are at the bottom of a cycle and always very bullish when the we are at the top of a cycle.

You only have to look at the performance of the Dow 30 index and even our own FTSE 250 to realise how relatively lacklustre our leading 100-listed blue chip stocks have performed over the last year.

I know the FTSE 100 is up some 30% since March of last year, however the market was down over 50% from its highs in early 2000; so we are still 35% from those highs. The FTSE 250 however is only 15% from its highs and the Dow 30 just 8.5% from its peak.

So why is the FTSE 100 struggling to recover to levels which many of its comrades have already done? Good question – is the 'new economy' making life difficult for some of the more traditional blue chip businesses in the UK?

We know how traditional, and therefore reluctant, many UK businesses have been in the past to adapt to the changing business environment. For example, Marks & Spencer were slow to adjust to the new retail environment.

However as a nation, we are survivors and will strive to succeed whatever is thrown our way. Many of those blue chip companies have been forced to adapt and are reinventing themselves all the time.

From a technical perspective, the FTSE 250 has been extremely strong and robust breaking through a strong resistance level at the beginning of this year propelling it from 5850 to its current levels at almost 6250. The FTSE 100 in comparison has been tired and has, in fact gone down in value since the beginning of this year from its open at 4500 to its current value of just under 4450.

Although in a strong upward trend, the FTSE 250 has reached a critical level. The area just north of current value has significant resistance levels. Firstly the 6200 area was the high of spring 2002, just before the index decided to fall off the edge of the cliff down to its lows at 3800 almost a year ago.

The 6200/6250 area is also the resistance point for an upward sloping channel that this index has been in since August 2003.

It would take a brave man or women to short the market here (i.e. predict it will fall) and I always encourage investors to enter positions in the direction of the trend. However this may be a prudent level to start taking some profits, with the view that if we break above 6200/6250 area, we can get back in for the rally up to 6600.

If these resistance levels do cause the index to retrace, we can expect the market to fall to around 5850, which will be a renewed level of good support.

The FTSE 100 still holds its upward trend with the broad levels of support and resistance at 4300 and 4600 respectively. Interim support exists at 4370 and has been a prudent level to buy over the last couple of weeks.

From a medium term perspective, it looks like the FTSE 250 will still outperform the FTSE 100. However, in the longer term we expect the blue chip index to catch up as many of these global corporations will have made their adjustments to the new economy and will be reaping the rewards.