|Historically the London Financial Times Market ($FTSE) has had a very close link to the Dow Jones Industrial Average ($INDU) and vice-versa. According to John Murphy, very often international markets lead the US. He believes that the FTSE and Japanese Nikkei are the most useful in determining market direction at home.|
|When international markets diverge, it is therefore a warning that the other markets will follow suit sooner or later. With that thought in mind, the FTSE may be trying to tell us something. On January 29, it hit a seven-year low of 3,391 and while it has recovered slightly since, the longer-term prognosis is not promising from a technical perspective (although it may experience a short-term bounce in early February). The index has dropped more than 48% from its December 1999 highs. |
In the case of the Dow, as of January 30, it had dropped only 32% from its January 2000 highs. As you can see from Figure 1, the two markets began to diverge in late 2000. This divergence increased in mid-2002.
|Figure 1 – Weekly chart of the FTSE ($FTSE) in blue and DJIA ($INDU) in red showing market tops and divergence between them (blue arrow). Assuming convergence, the DOW should be trading at a seven-year low (red horizontal line) of 4,870, which was its November 10, 1995 level (see black circle).|
|Graphic provided by: MetaStock.|
|Intermarket analysis does not seek to explain the reason for market divergences but this does pose an interesting question. There are those who believe that the DOW has been kept artificially high. Comparing it to the FTSE and Nasdaq indexes, this argument would appear to have some merit although there is a complex array of factors involved. |
If the Dow follows the FTSE, it should continue trading down to its seven-year low. The other possibility is that the FTSE will follow the Dow's lead and recover significantly. Given the current fundamental challenges facing the US and global economies, however, this scenario must be considered less likely.
Blackman, Matt  "10 Fundamental Challenges Facing a Market Rebound," Working Money: December 17
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