The FTSE 100 (FTSEINDICES:^FTSE) has put in a remarkable performance since the EU referendum, climbing from below 5,800 points immediately after the vote to above 6,900 points this week. The blue chip index has been propelled higher by a weaker pound and increased stimulus from the Bank of England and the near-20% gain since the Brexit vote has caught many investors off guard. The index is now approaching the critical area of 7,000 points, a number that has spelled trouble in the past, and investors might be asking whether now is the time to buy or sell the index. Here’s my take.
Point of resistance
History tells us that the 7,000 point mark isn’t a great friend of the FTSE 100 index. Going all the way back to the 30 December 1999, the FTSE 100 came within 50 points of 7,000 to reach a high of 6,950 points. However, the index then spent the next three years falling heavily to below 3,500.
Similarly, in 2007, the FTSE 100 was closing in on 7,000, before it crashed rapidly back to 3,500 during the Global Financial Crisis.
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After a slow and steady build up during 2013 and 2014, it finally breached the 7,000 point mark in early 2015. Investors were excited, thinking that this might finally be the start of a blue sky run, but it wasn’t to be, with the key index plummeting back down to 5,500 points early this year.
Clearly, 7,000 points is a strong area of resistance for the FTSE 100.
Cash on the sidelines
As much as I’d love to see the FTSE 100 soar through the 7,000 point mark and keep charging upwards, I’m not confident that it will do so in the short term.
Technical indicators reveal that the FTSE 100 is in ‘overbought’ territory after such a strong recent rise, and with the volatility index (VIX) or ‘fear index’ trading at a very low level, it appears investors are in a complacent mood right now and that could mean a market correction isn’t far away.
Now while I’m certainly not suggesting that investors rush to the exits and liquidate their entire portfolios in preparation for a crash, I do believe it could be a sensible idea to have some cash on the sidelines with the FTSE 100 approaching such a critical level. I’ve been boosting my cash pile recently, so that if Brexit fears return and the market does undergo a correction, I’ll have cash available to deploy back in at lower prices.
An excellent long-term strategy
Another sensible idea for long-term investors is to invest via the process of ‘pound cost averaging.’
This involves drip feeding funds into the market on a regular basis, perhaps monthly or quarterly. This way, if the market rises you’ll pay more for your investments but if it falls, you’ll pay less. Overall it balances out for an average entry point. Importantly, this process prevents you from investing a lump sum at top prices and no matter whether the FTSE 100 rises above 7,000 points or falls back down again, over time you’ll receive an average entry point.
