The FTSE : An Unusual Risk Profile
This week we will focus on the FTSE and its move trelative to the weaker advanced countries: the IBEX 35 and FTSE MIB in particular.
Regardless of view, motive or opinion the IBEX 35 and FTSE MIB in particular <insert others as required> went on a rampage rally. That is now etched into the annals of price action history.
Perhaps the most intriguing part about the Friday ramp was the relative position of the FTSE when it took on the bid. The IBEX and Italy’s MIB were plumbing the lows of their relative quant risk models however the FTSE was barely at 50/50 risk.
For clarity, let’s talk in straight risk profiling:
IBEX 35 risk/reward in a scale 4 to 1 was dialing in at -4 an outlier event space to an accumulative, a whopping 8, not say it will travel the entire distance. What does that mean? Well the IBEX had run almost double the distance from model centre to base creating a 1:8 risk:reward profile and that is just for a return to model centre. The FTSE MIB was much more measurable stopping on its adjusted model base (level 1). This offered 1:4 risk/reward.
In many respects given the weight of money that has chased yield stocks this year expecting sidways price action, the prospect of decent growth from heavily oversold conditions proved too much to ignore. This could well be due to the “Go away in May” crowd realising that they are now trailing indices on the sidelines and jumping in desperate to make up some lost ground.
Low hanging fruit is one thing, however what about the FTSE?
London’s FTSE 100 rallied from a relatively odd market space position at a quant risk model checkpoint. What we call a checkpoint in lay terms, is actually a calculated confidence error of our own proprietary design. Price stopped on our quant level 3 (coin toss risk/reward) there for three weeks prior in early June, fell to our lower checkpoint and has now returned to the level at 50/50 risk again. Odd? We believe so.
One suggestion is that the United Kingdom, despite its problems, in relation to its cousins is considered a safe haven. An interesting analogy comes in the form of MKS:LSE Marks and Spencer’s.
If you have been following us on twitter you may have noticed us mentioning MKS, along with others on the LSE, in March, then again we tweeted remarks on the 20th July as the FTSE 100 begun coming away from its 1:1 and earned itself a place on our main monitor. The fact that we never saw a real improvement in risk profiling, a mere .5 suggests participants are keen when sentimentally able to buy and when sentiment is drifting or worsening they tend not to dump the stocks on the indices. MKS is a case in point.
MKS in fundamental terms is a reasonably solid stock but is no dynamo. Unlike some financials in the same indices it is a low, slow beta player with a yield that “helps”.
To qualify a few facts:
Dividends paid on the last pay day, 13th July, amounted to 10.8 pence per share, at time stamp price a 3.41% Gross dividend yield. Good old Gordon´s Dividend discount model says nothing much, basing on FT 5 year dividend growth data we will not see much growth in the yield.
This may not tell us much however its quantitative data from the last high to high is more interesting. Cycles produced a below average downturn on both near-term(s) and the larger term models. In near terms price fell only 50% of AVERAGE taking bids near-term at strong pulse rates. In the larger model we amounted to bare criteria before racing back to fitted model lines, and then racing to positive risk AVERAGES in near-term spaces.
Our job here is not to pull out crystal balls and give guru like directionals, merely to analyse the market space and produce probabilities of future outcomes. We will refrain from supplying personal or our fund’s opinion: you can decide.
But I can say we missed out on positioning into this stock for the current rotation despite close monitoring based on current climate and found this to be of interest. This keen pricing suggests either huge weight of expectation on more QE/LTRO or fund manager desperation to board a moving train. If the latter, then we all know how that usually ends up.