How Much Higher Can the FTSE 100 Stock Market Index Go?

By: MoneyWeek

Will the FTSE 100 break a new record today?

The index closed up 9 points yesterday. That made it the 11th winning session in a row. That's the longest streak of gains seen since early 2004. It's never managed 12 in a row before.

But judging by the way the market's opened today, it may well manage it by the end of today's session. And with every new record, and each new gain, more and more uneasy bears will be looking to switch camps and join the bulls.

So how much higher could the FTSE 100 go?

Why the FTSE 100 keeps rising

They say that markets climb a wall of worry, and there's plenty of worry to go round. But for now, none of those worries are new. So the FTSE 100 has been steadily ticking higher as all the fund managers and investors who were bearish back at the low point in March, watch the market rise and start to panic that they're missing out.

After all, they reason, the outlook might be grim, but it's not as grim as it was. The financial system isn't going to collapse. Some companies are even beating earnings expectations.

Most of the earnings surprises are coming from companies cutting costs, rather than growing sales. So that can't last. And while the financial system has been bailed out, it has come at huge cost to the government and taxpayers. The US has to sell something ridiculous like $200bn of Treasuries this week alone, which has everyone watching the bond market nervously.

But for now, all of those concerns are taking second place to shorter-term fears about underperforming the market. Arguably, the main driver of stocks over the next month or so will be how panicky investors get about missing out on the bounce.

How high can the FTSE 100 go?

In the absence of specific news events, technical analysis or charting is as good a way as any to try to get some sort of idea of where markets might go next. James Ferguson, who writes the Model Investor newsletter, reckons that using technical analysis (we cover some of the basics in the next issue of MoneyWeek magazine, out on Friday - if you're not already a subscriber, claim your first three issues free here), the FTSE 100 could well have further to rise from here. If it manages to break through 4,600 and stay there, then the next major sticking point is 4,700. And if it beats that, it could go as high as 5,100 or so.

But as James points out, there were plenty of hefty bear market rallies during both the Great Depression and Japan's "Lost Decade". And when everyone gets back from their holidays and autumn kicks off, the slap of cold reality might well derail any recovery. By then, we may well be seeing banking bad debts rise more rapidly than people expect; easy gains from cost-cutting by companies will be slowing down; and concerns about the solvency of various eurozone economies in particular will still be on the radar.

So if you're the sort of person who enjoys trading, or a bit of speculation on the side, then by all means keep an eye on the market and place a few short-term bets (remembering to set stop losses of course). But if you're a long-term investor, we still think you'd be better off picking up individual UK-listed stocks, rather than a tracker right now. If you're keen to invest in an index tracker for the longer term, we'd be far keener on a combination of Asian and emerging markets – my colleague Cris Sholto Heaton has dug out a long list of the various exchange-traded funds that you can use to play these markets, which is well worth reading: How to use ETFs to invest in Asia.

BP's figures beat expectations

So which individual stocks should you buy? Well, we've been recommending defensives over the past six months or so, including pharmaceuticals, utilities and tobacco stocks.

And another of our favourite FTSE 100 stocks reported this morning. Oil major BP (LSE: BP), Europe's second-largest oil company, saw profits fall by 53% in the second quarter compared to the same time last year, but the share price was little changed. In fact, the figures beat analysts' expectations, according to Bloomberg.

Unsurprisingly, the slide in the oil price since last summer has taken its toll on BP's profits. Oil refining margins were also weaker. But the group still managed to rake in $4.39bn during the second quarter. The good news is that production also rose again, up 4.6% on last year. BP has also managed to slash its costs. In fact, it's already met its original 2009 target of $2bn in cuts in the first half, so it raised its cost cutting target to $3bn.

Of course, all this cost-cutting and slashing of investment does suggest that at some point in the future we'll be seeing further spikes in the oil price, as demand outstrips supply. But for now, BP reckons there's "little evidence" of a recovery in demand.

We've been fans of BP for quite some time. It's not as cheap as it was, but with the forward dividend yield still sitting at around 7.3%, we'd still be buyers if you haven't already picked some up. The oil price looks vulnerable to falling back when investors realise that global growth isn't going to justify $100 a barrel for quite some time. But with management committed to sustaining the dividend, BP looks a decent defensive bet paying a good income.

By John Stepek for Money Morning , the free daily investment email from MoneyWeek magazine .

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