Miners dragged down Britain's blue-chip index on Friday in a wave of profit-taking which could push the market down to levels that will lure in the large numbers of investors who have sat out the early 2012 rally.
Mixed US data, signs of defiance from Spain on strict EU austerity targets, ongoing concerns about Greek debt restructuring and high oil prices all combined to send the FTSE volatility index - seen as a gauge of investors' fear - 4 percent higher for the week.
----- Barclays leads banks higher in LTRO rally
The FTSE 100 closed 0.3 percent, or 20.12 points, lower on the day at 5,911.13 and below the 10-day moving average - a mildly bearish signal from a technical perspective. The dip trimmed the index's year-to-date gains to 6.4 percent.
"I have never known a market to hold on to these kind of gains after such a strong start to the year. I would expect a pullback to be fairly sharp - ... 3-5 percent, but probably over the space of a few days rather than in one go," said Dominic Lowres, head of large-cap cash trading at Liberum Capital.
"People missed (the rally) in January and February and now they are waiting for a pullback."
Miners, which have surged 13 percent since the start of 2012, fell nearly 1 percent on Friday, led by a 5.8 percent drop in Kazakhmys, following a string of bearish analyst comments the day after its full-year trading update. "The entire mining sector is being impacted by cost pressures and high capex. We see Kazakhmys at the sharp end of this theme with high inflation/falling grades, long dated growth and very high capex intensity," Liam Fitzpatrick, analyst at Credit Suisse, said in a note, reiterating an 'underperform'.
Falling gold prices helped shave around 1 percent off the share price of both Fresnillo and Randgold. Another gold miner, Xstrata, dropped 1.3 percent while commodities trader Glencore was off 1.7 percent on investor concern that the planned merger between the two may face hurdles from regulators and Xstrata shareholders.
"There's been a decent 'put' trade on Xstrata for March expiry, they are down more than the market, and the ratio versus Glencore is quite stretched, so it looks like someone is increasing a bearish bet on them," Liberum Capital's Lowres said.
On the flip side, financials - the second biggest weight in the FTSE after basic materials - extended their rally, cheered by this week's injection of cheap 3-year funds into the system by the ECB. Banks were up 0.5 percent, adding to the previous session's 1.9 percent rise.
"The LTRO funding has improved liquidity and will help sector preprovision profits, while banks still trade at a reasonable multiple of book value," Goldman Sachs said in a strategy note, upgrading the European sector to 'overweight'.
Barclays, which snapped up 8.2 billion euros ($10.9 billion) of the ECB cash to manage funding gaps on Spain and Portugal, added 2.2 percent. On top of the leader board, though, was International Power , which climbed 4.4 percent, boosted by reheated talk that France's GDF Suez is set to table an offer for the 30 percent of the electricity generator it does not already own.
Four times as many International Power changed hands than usual, with sentiment also lifted by news it had signed up for two Indonesian geothermal projects with GDF Suez. On the index as a whole, though, volumes were at just 79 percent of their 90-day average. The lack of volume which has characterised the stock market rally in the past two months is seen by some as an argument for further gains, even if these may be tempered by phases of correction and consolidation.
"Investor sentiment and positioning remain supportive for further equity market gains," said Valentijn van Nieuwenhuijzen, head of strategy at ING Investment Management, who is 'medium overweight' on equities. "Our assessment of risk seeking behaviour of investors is positive, short-term market momentum is strong and anecdotal evidence of asset allocator and hedge fund positioning suggests that many investors still remain defensively positioned.