Is a correction coming for the FTSE 100?

We are living in interesting times. As President Trump battles against allegations of collusion with Russia, North Korea tests yet another missile and China’s credit status is downgraded by Moodys, stock markets are hitting record highs.

So, is it a good time to be investing in the stock market, when the general election is imminent?

The answer lies in your appetite for risk and how long term you view your stock investments to be, but before we consider those factors, let’s look at where the FTSE 100 may go from here.

Is a market correction on the way?

If we take a look at this daily chart of the FTSE 100, it is plain to see that this index of leading UK shares is at an all time high, with its last closing price of 7547.60.

THe FTSE 100 daily chart for 26 May 2017

FTSE 100 prices are hitting record highs, but traded volumes are falling

The performance of this index over the last year has been stellar, driven mostly, by the weak pound following the Brexit vote.

As the chart shows, however, the ride has been rocky. For example, at the end of April, the FTSE 100 was around 400 points below its current price.

Stock prices never just continue to rise, without periods of selling as investors take profits or react to events. So, it is normal for occasional price corrections.

However, for those who like looking at share charts, there is a tell-tale sign in the above chart that the latest highs may not be as healthy as they first appear.

Trading volumes have fallen as the price has pushed higher.

That is a sure sign that traders and investors are becoming wary and market participation is falling, yet optimism still exists as some investors continue to buy constituent shares, pushing the index higher.

Maybe the “smart investor” is starting to take profits, selling their shares to other, perhaps less knowledgeable investors, who are confident that the index will continue its upwards trajectory.

With all the political uncertainty at the moment – both in the UK and abroad – and traded volumes not supporting the high index price, it does look like a short term correction may indeed be on the cards soon.

Does a correction matter to you?

Well, that depends on whether you are an investor or a trader, and if an investor, how long term you want to hold your equity investments.

If you are a trader

I imagine that you are reasonably happy taking market risks, and probably take short term positions in the market. Do you also short the market when you see the opportunity?

Volatility is your friend so there are always plenty of trading opportunities when there is so much political and economic uncertainty. As there is now.

A Forex trading chart

You need not be buying equities to benefit from short term market positions – stamp duty can be costly and the commission costs can also eat away at profits from short term trades.

You might want to consider trading derivatives with a company such as TradeTime, who offer CFD’s (Contract for difference) in over 150 instruments.

There are other vehicles such as binary options too, but these are generally only suitable for very high-risk trades.

If you are an investor

If you are a long-term investor then you are probably already in the market with a strong, diversified, portfolio. You are doing really well!

Whether you should take profits and go to cash depends on your long term investment strategy. And your view about how the General Election will influence markets.

If you are a truly long-term investor with a good portfolio and with strong capital gains already, I imagine that you will be riding out any short term weaknesses in the market.

If you are an investor who is feeling unsure about all the political uncertainties, then maybe now is the time to consider taking profits at this high level. You can always re-enter the market at lower prices if a correction does become a reality.

This article is for information and educational purposes only and does not form a recommendation to invest or otherwise. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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