The FTSE-100 and service companies
Comment of the Day

September 26 2012

Commentary by Eoin Treacy

The FTSE-100 and service companies

Eoin Treacy's view The FTSE-100 has been mostly rangebound since 2010, within the context of a much larger congestion area that has been evident since 1999. It has held a progression of higher reaction lows since May and retested the upper boundary near 6000 last week. It will need to hold above 5600 on the current pullback if the benefit of the doubt is to continue to be given to the four-month uptrend. A sustained move above 6000 will be required to confirm a return to medium-term demand dominance.

The banking and materials sectors dominate the FTSE-100 which helps to explain the relative underperformance of the Index. Nevertheless, following a click through of its constituents this morning, some clear trends are evident.

The banking sector appears to be in a process of building support relative to the wider market. However, more time is probably required before it is ready to resume a position of leadership. Against this background, it is notable that a number of asset managers and insurance companies have performed considerably better. Aberdeen Asset Management, Old Mutual and Hargreaves Lansdown all rallied impressively but have become overbought by any measure and are susceptible to mean reversion. Prudential hit a new all-time high last week and a sustained move below 770p would be required to question medium-term scope for continued upside. Standard Life broke out of a more than three year range in July and continues to extend the advance. A sustained move back below 250p would be required to question medium-term scope for additional upside.

Veteran subscribers will be familiar with our views on companies such as Unilever, Reckitt Benckiser, Diageo, SAB Miller, GlaxoSmithKline and Vodafone from various reviews of Autonomies. Astra Zeneca and Associated British Foods also approximate the performance of this sector. However, what was perhaps most evident from this click through was the outperformance of the UK's various service sector companies.

Experian (credit scores) yields 2% and found support in the region of the 200-day MA from May. It hit a new all-time high in August. While mildly overextended relative to the trend mean, a sustained move below it would be required to begin to question the consistency of the medium-term uptrend.

WPP Group (marketing) is globally diversified, has a solid record of increasing its dividend and yields 3.04%. The share has returned to test the 900p level over the last year and a sustained move below 800p would be required to begin to question medium-term scope for a successful move to new all-time highs.

Pearson (education & publishing) is an S&P Europe 350 dividend aristocrat and yields 3.66%. The share has held a progression of higher reaction lows since late 2008 and found support in the region of the 200-day MA again two weeks ago. A sustained move below 1150p would be required to begin to question medium-term scope for additional upside.

Serco (management services) is an S&P Europe 350 dividend aristocrat and yields 1.52%. The share broke an 18-month progression of lower rally highs in February and a sustained move below 550p would now be required to challenge the 9-month uptrend and question medium-term scope for additional upside.

Capita Group (business process outsourcing) is an S&P Europe 350 dividend aristocrat and yields 3.04%. The share has been mostly rangebound since 2007 and has returned to test the upper boundary. A sustained break above 800p will be required to confirm a return to demand dominance beyond the short term.

Compass Group (contract food service & support staff) is an S&P Europe 350 dividend aristocrat and yields 2.99%. It completed an 18-month consolidation in February and a sustained move below the 200-day MA would be required to begin to question medium-term demand dominance.

In conclusion, while the wider market has been plagued by uncertainty there are a number of globally oriented companies that continue to perform. A number of the above service companies approach the criteria of our Autonomies designation, particularly WPP.

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