5,000 Or 7,000: Where Is The FTSE 100 Headed Next?

I wrote less than a month ago that the FTSE 100 (INDEXFTSE: UKX) was in severe peril of an imminent collapse. How wrong I have proven to be!

Britain’s blue-chip index was dealing around the 5,600-point marker at the time, visiting levels not seen since the dying embers of 2012. Since then the FTSE 100 has galloped 10% higher, taking in its highest levels of the year around 6,200.

Still, I’m not breaking out the party streamers just yet, and believe a sharp correction may still be just around the corner.

Commodities lead the charge

A solid recovery in commodity values has been the chief driver behind the FTSE 100’s march higher.

Brent crude has galloped from the multi-year troughs below $28 per barrel visited in January, and was recently topping the $40 milestone. And iron ore prices have continued their hearty canter higher — the steelmaking ingredient rose 19% alone on Monday to $64 per tonne, the biggest one-day gain on record.

The recovery in resources prices has meant that energy and mining companies have dominated the ‘green’ side of the FTSE 100 in recent weeks. Diversified giants Anglo American and Glencore have been the index’s big winners since the start of February, their stock values advancing 93% and 60% respectively.

Busy bankers

But iron ore’s breakneck ascent this week illustrates the amount of ‘froth’ being chucked up as investors get caught up in the feeding frenzy, not just across the commodities space, but across much of the FTSE 100 as a whole.

Along with leaping fossil fuel and metal values, traders have been buoyed by the prospect of further monetary stimulus from the world’s central banks. The People’s Bank of China has already cut rates and injected more capital into the system this month, while the European Central Bank is anticipated to roll out fresh initiatives later this week.

What goes up…

But make no mistake: policymakers across the globe still have plenty of work in front of them to avert another financial catastrophe, as illustrated by the steady stream of calamitous economic data.

It was announced overnight that Chinese exports slumped by a quarter, year-on-year, in February, news that has sent many stocks shutting lower again. Anglo American has sunk 16% from Monday’s close, while Glencore has shed almost a fifth of its value.

And the precarious state of the market was underlined by the IMF’s David Lipton just today.

The economist commented that “risks have increased… with volatile financial markets and low commodity prices creating fresh concerns about the health of the global economy“. He added that such fears are being worsened by a perception that “policymakers in many economies have run out of ammunition or lost the resolve to deploy it“.

Red alert

As I have mentioned, the bearish view on the FTSE 100’s likely direction that I expressed last month has proven to be wide of the mark, and the scale of volatility washing across global markets means my prediction may continue to come up short.

However, I believe any failure in my prediction is likely to prove a short-term phenomenon as the emerging market cooldown intensifies, a scenario that is likely to see many of the index’s overbought stocks to come back to earth with a bump.

With this in mind, I reckon the FTSE 100 is more likely to fall backwards than march towards last year’s record above 7,000 points.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.