FTSE energy vs tech sectors

The FTSE 100 hasn't fallen as much as other benchmarks during the first half of the year. But from the winners and losers, can we figure out what'll come next?

Weighting vs price

Over 80% of the UK benchmark index fell during the last three months. However, the relatively ‘less-bad’ performance was influenced by negative stocks generally drifting lower, while better-performing stocks jumped. Among the worst-hit were commodities producers, as investors fear a building recession; while other stocks had relatively steady gains as people are expected to keep buying their products, such as tobacco firms.

But one of the interesting swings was the disconnect between certain sectors. The tech sector broadly underperformed, with the second-worst results of the quarter going to Ocado. Meanwhile, energy stocks did relatively well, despite facing serious challenges. This isn't all that surprising as stocks with high valuations suffered as the BOE tightened policy.

Surprises and the future

Despite the highest crude prices in years, the energy sector wasn't the best performing; it was banks. Partially, this had to do with major firms such as BP and Shell divesting Russian assets, and taking losses. Another part is that these firms were locked into several months of hedging contracts, which delayed the receipt of higher cash flows from the higher prices.

Now that tech stocks have reduced their valuations, they are in a better position should something happen that reverses the policy of the BOE. When that will happen is still an open question. But a looming recession could reverse the current situation. Europe is seeking to build up its reserves ahead of the winter, and once filled, energy demand could start to level off and energy stocks could take a turn for the worse.

Bulls rejected at 50-week SMA

The FTSE has reached a high of 7670 and a low of 6760 this year, forming a near-term range around the 50-week average of 7300. Last week, bulls met plenty of resistance at the said SMA and the index legged lower to the Jan 2021 support of 6960, where a temporary bottom is in. Come this week and the rejection at 7010 has been bought. If markets are not taken by any surprises, another weekly ‘doji’ candlestick will likely be complete.

In a shorter consolidating structure between 6960 and 7300, traders are hanging over a break outside the zone for medium-term directional clues. But sentiment is overall bearish. Losing the bottom will open up the door to the 2022 low of 6760 and then the June 2021 top at 6500. Inversely, breaking past the SMA will expose the 7650-7730 area of preceding tops, with the latter providing leeway to the round resistance of 8000.

Source: Spreadex trading platform

Key takeaways

The FTSE is down overall, but not as much as other indices as banks outperformed. Energy stocks did well despite increasing challenges while the tech sector did not as it was impacted most by tightening policy. Going forward, however, tech stocks could turn out to be the best performing sector if BOE halts hiking unless a looming recession reverses the current situation.