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Mastering the Italian FTSE MIB Index: Deep Dive Trend Analysis, Key Finding & Outlook!

Market Regime Newsletter

A quick glimpse into our market research

Sample Research

Here’s a sample of our Weekly Market Regime Newsletter, also serving as a blueprint for using our tools to identify profitable market regimes

Key Points:

This Market Regime Newsletter was issued on June 9th, 2024

  • The FTSE MIB Index, tracking the 40 most capitalized stocks on the Borsa Italiana, has surged an impressive 15% this year.
  • Interestingly, the FTSE MIB Index still trades at a significant discount, with a price-to-earnings ratio of 9.7, making Italian stocks attractive for investors seeking undervalued assets with high growth potential.
  • Currently, our data provides an outright positive outlook for the FTSE MIB Index, which is in a ‘Very High Reward’ market regime for both the market’s short- and long-term perspectives. This indicates that the current bull market is still driven by healthy volume flows, a robust uptrend participation rate among the FTSE MIB Index constituents, and high smart money positions.
  • Historically, the FTSE MIB Index has shown gains in 87.2% of instances within a ‘Short-Term Very High Reward’ market regime, and in 68.3% of cases within a ‘Long-Term Very High Reward’ market regime.

Current Market Regime of the Italian FTSE MIB Index

Description of the current Short- and Long-Term Market Regime:

Robust uptrend: Highly positive market regime accompanied by significantly low volatility. Prices consistently show an upward trend, supported by a wide range of well-performing stocks within that market. Even in the face of negative news, the market demonstrates remarkable resilience with such a high positive trend quality. Weak trading days are typically short-lived overbought or sentiment driven reactions, leaving the market better positioned for further gains.

Driving Forces Behind the Current Market Regime:

Our approach to defining market regimes is rooted in a comprehensive analysis that incorporates a variety of indicators ranging from categories like trend, trend quality, and sentiment. This thorough methodology allows us to identify strong trends and classify them into specific market regimes based on their underlying strength. By integrating evaluations of both dumb- and smart-money positioning, we maintain an objective and balanced perspective on current market conditions.

The spider chart below exemplifies this approach by breaking down the current trend status of the Italian stock market (FTSE MIB Index) into its essential components. Values on this chart range from 0 to 100, with higher numbers indicating stronger positive signals for each component, while 50 signifies a neutral stance.

Italian stocks (FTSE MIB Index) are currently exhibiting strong performance across nearly all timeframes and key components, indicating a robust uptrend. For instance, the trend score for mid- to long-term perspectives is a perfect 100, signifying that all trend indicators for the FTSE MIB Index in this period are positive. More importantly, the trend quality score is also 100, meaning that also all underlying stocks in the FTSE MIB Index are maintaining a strong uptrend momentum within these timeframes.

This bottom-up trend analysis provides a comprehensive view of current market conditions. However, in the short-term perspective, the trend score is 66 and the trend quality score is 57. This indicates that while the short-term trend has slightly softened, the majority of short-term indicators remains positive.

When combined, these scores correspond to a ‘Very High Reward’ market regime for both the short- and long-term, demonstrating that the rally is still characterized by robust momentum, an increasing number of participating stocks, and rising smart money positions.

Given the strong readings across various metrics, the current uptrend is expected to continue steadily, reducing the likelihood of a sudden reversal.

To track the trend status of Italian stocks over time, we aggregate these key components according to their timeframe into Market Health Indicators. These indicators are composites of the key components for three distinct timeframes. Scores range from 0 to 100%, where values below 50% suggest a negative outlook and values above 50% indicate positive market health.

The chart below displays the FTSE MIB Index in the first panel, with three subsequent panels outlining Short-, Mid-, and Long-Term Market Health over the past year.

Last autumn, Italian stocks (FTSE MIB Index) experienced a notable regime shift when our Short- to Long-Term Market Health Indicators began to decline, falling below the 50% threshold. This pattern is typical of a developing downtrend, marked by a significant increase in negative signals across our trend, trend quality, and sentiment indicators. Consequently, the FTSE MIB Index underwent a prolonged correction phase until early November last year.

How to spot high-reward & low risk market opportunities

3 Steps for Determining Market Regimes

With our structured approach, we can identify the respective market regime for any market. Our methodology include the following steps:

1

Identify Robust Trends

  • Trends are measured through a systematic screening of signals from multiple indicators (for example the WSC Trend Index, the Smart Money Flow Index or the Daily Put-/Call Ratio All CBOE Options)
  • These indicators cover various categories (trend, trend quality, and sentiment, including dumb- and smart-money positioning) and timeframes.
  • This diversified approach minimizes the impact of noise in individual indicators and enables an unbiased and robust view of current market conditions.

2

Monitor Market Health

  • These indicators are representing composites of these signals for three different timeframes.
  • Scores on a 0 to 100% scale denote signal positivity.
  • Values below 50% indicate a negative outlook, while those above 50% signal positive market health.
  • The combination of these health indicators results in market regimes, indicating the strength of the current trend for a specific timeframe.

3

Determine Market Regimes

  • By combining short- to mid-term and mid-term to long-term market health readings, the specific market regime is determined.
  • These Market Regime gauges help identify market regimes and shifts without the hassle of going through all indicator signals.
  • To be more precise, the Tactical Short-Term Market Regime is constructed upon the combination of short- to mid-term market health, while the Strategic Long-Term Market Regime is based on the amalgamation of mid- to long-term market health.

Currently, the Short- to Long-Term Market Health readings demonstrate impressive strength, ranging from 66% to 100%. This highlights the robust nature of the current uptrend in the FTSE MIB Index, driven by the majority of stocks within the index, strong volume flows, and high smart money positions. With these conditions persisting, the outlook for Italian stocks remains very promising. The current uptrend began in early November when Short-Term Market Health surged towards 100%, with Mid- to Long-Term Market Health also showing improvements. These patterns are typical of an emerging uptrend following significant losses, indicating an ‘Increasing Reward’ market regime. In this regime, investors should start building positions while waiting for further confirmation of the uptrend through improving Mid- to Long-Term Market Health readings. However, during this period, sentiment is often quite fearful, leading many investors to hesitate and act based on emotion rather than facts.

Additionally, our Market Health Indicators not only identify strong up- and downtrends but also distinguish between healthy and corrective consolidation periods. This capability is highly advantageous as consolidation phases are critical. They can either set the stage for further gains or signal the beginning of more significant downtrends. Therefore, determining whether to capitalize on profits, take advantage of potential dips, exit the market, or even adopt a short position becomes challenging in these scenarios.

As illustrated earlier, healthy consolidation periods are characterized by short-term indicators turning negative while the mid- to long-term conditions remain strong. This pattern was observed from early to mid-February and again in April this year. During such periods, the market often trades sideways, pausing before resuming its upward trajectory.

From Market Health Indicators To Market Regimes:

This positive market environment is reflected in our Market Regimes Gauges below. By combining short- to mid-term and mid-term to long-term market health readings, the specific market regime is determined. These Market Regime gauges help identify market regimes within seconds. To be more precise, the Tactical Short-Term Market Regime is constructed upon the combination of short- to mid-term market health, while the Strategic Long-Term Market Regime is based on the amalgamation of mid- to long-term market health.

What the history tells us about the current Market Regimes

Since the availability of full market regime data dating back to 2002, the Italian stocks (FTSE MIB Index) has entered a ‘Very High Reward’ market regime 281 times from a short-term perspective and 82 times from a long-term perspective. These market regimes are characterized by Short- to Long-Term Market Health readings above 50%. Remarkably, in 87.2% of these instances, Italian stocks yielded a total cumulative gain of 639% for short-term traders and 218% for strategic long-term-oriented investors. Additionally, the average volatility within these regimes was between 14% and 18%, which is quite low.

The Bottom Line

  • With the ‘Very High Reward’ market regime persisting across both timeframes, the outlook for Italian stocks remains compelling. Even when compared to other global market indices and sectors, the uptrend in the Italian stock market appears exceptionally strong.
  • While temporary consolidation periods may occur, the risk of a major trend break remains low as long as Mid- to Long-Term Market Health maintains its strong readings, supporting a positive market regime.