The UK Index  rally from December 27th 2.5yr lows of 6538 has extended to 425pts or 6.5%. The index of UK-listed Blue-chips is up almost 250pts, or 3.4%, so far in 2019. Depending where you draw your trend-line, a breakout could be on the cards. We could soon be trading a 7000 handle again. We haven’t been here since early December, when markets sold off into Christmas, ensuring Santa’s traditional rally would elude us. It would be a big psychological hurdle to overcome.

The UK Index has rallied 3.4% this year

Clients are excited by the rebound, reminiscing the 7800 highs that the index fell, wondering whether 10% upside is feasible. And the question I have been asked most this week: what is driving the current rally?

Some will want a detailed answer. Things like optimism about a delayed Brexit, or at least a lesser chance of a harmful no deal. China is throwing more stimulus at its slowing economy. There are hopes that the US-China trade war will be resolved. The Fed may pause its interest rate hikes to avoid the risk of triggering a US recession.

All valid answers. But in terms of what’s actually driving the UK Index , component-wise? It’s the likes of oil majors BP and Shell, which have contributed 28pts/11%, boosted by an oil price bounce. Miners Rio Tinto, Glencore, Anglo American and Antofagasta have also offered 20pts/8%, helped by China stimulus and a weaker USD for commodity prices.

Banks Lloyds, RBS and Barclays have helped out to the tune of 44pts/17.6%, on hopes of a better Brexit, perhaps even none at all. Insurers Aviva and Legal & General lay claim to 14pts/5.6% for similar reasons along with the Housebuilders which have a good start to the year with 15pts/6%, supported by generous 8-10 dividend yields. Lastly, Retailers Tesco and Primark-owner AB Foods have chipped in with 22.5pts/9% following decent Christmas trading updates.

I could go, on, but that’s the crux of it. Many a household name contributing more than half of the index’s recent advance. And mostly risk assets, those exposed to and sensitive to growth, going up on optimism, and down on pessimism. That’s not to say all stocks have gained. Far from it, with several defensives having a tough time since end-December.

AstraZeneca has deprived the UK Index of almost 10pts, with its Chief Medical Office leaving. Reckeitt Benckiser has removed 4pts on news of its CEO leaving by year-end. Vodafone’s extended declines have lopped 3pts from the index on news of job cuts to counter profit declines and structural challenges. Diageo has also hurt (3pts), with its 4% index weight impacting via investor rotation back into risk assets.

Thankfully though, that’s it for the negatives, meaning damage at the tail end has been limited. Hence the positive contributions easily outweighing, propelling the index higher. But I’m not going to say that had you been in all the stocks which have rallied you’d have banked a profit.

My observation here is that, as the adage goes, “nobody rings a bell at the top or the bottom”. It’s about being able to jump on what you consider sufficient proof of a bounce, a turnaround or breakout that signals a change in trend. Being able to ride momentum which you think has legs and could rally further. Many of the positive contributors have been rallying for several days.

Calling the top or the bottom correctly will, of course, make you maximum profit. But it also carries the most risk. Furthermore, how can you know for sure it is the top or bottom until after the event? Rather than trying to pick the one big winner to make you a profit, let me do the hard work. That’s why I trawl the charts for the best signals each day.

For our latest trading opportunities on UK Index components get access to our research Gold Pass and choose from a manageable selection of daily hand-picked share price breakouts, ranges, momentum and rebound candidates which could help you make your next profit.

Mike van Dulken, Head of Research, 18 Jan 2019