There is no magic bullet or indicator that can consistently predict the future. Today's helpful variable is often useless at a later point in the stock market cycle. The trick is to spot a fresh event or trend that might move prices tomorrow.
One issue that keeps me in the bullish camp is recent price action on the FTSE 100.
Some investors worry that the Footsie has not rebounded strongly from its April-May sell-off. I believe their view has been distorted by oil giant BP. It has a heavy Footsie weighting and its ongoing Gulf of Mexico oil spill crisis confuses the issue.
Two lines on my chart illustrate this point. The red line is an adjusted version of the FTSE 100 with BP eliminated. The blue line plots the index as it normally appears with BP included.
Notice how both lines declined in lock-step soon after the April 20 explosion. But the trends began to diverge about five weeks ago and the gap has steadily widened ever since. The adjusted, non-BP Footsie regained half the ground it lost since touching its low on May 25. But the bounceback is much weaker once BP is included in the index. Investors who worry about broad stock market weakness are clearly being misled by BP's sorry performance.
Another point worth thinking about is that UK shares reacted well to last week's economic update from the newly formed Office for Budget Responsibility. Chancellor George Osborne’s warning of more pain to come did not upset the markets, either. More information will come when the emergency Budget is announced on Tuesday. But so far, so good.
Prospects for the upcoming US second-quarter earnings season also cheer me. Shares often rise on both sides of the Atlantic in the run-up to the reporting season if investors expect positive results. My hopes are high for the near future because earnings were weak one year ago. US companies should turn in whopping profit increases.
Given the influence of Wall Street on UK shares, I also make it a point to monitor US economic conditions and investor sentiment. Right now, there is growing concern that the current growth spurt among America's large multinational companies might slow later in the year. This could affect UK investment prospects. However, little attention is paid to the nation's small businesses. I believe this is an important omission. Small companies account for half the US economy and are generally regarded as the main source of US job creation. Rising employment has a significant effect in key economic segments such as residential housing and retail sales.
US small businesses have been in recession throughout 2010, unlike their bigger brothers. But prospects for the future are beginning to change. According to Ian Shepherdson, chief economist of High Frequency Economics, small businesses remain in a depressed state but sentiment among managers is beginning to improve.
A useful guide to this segment of the economy is a monthly survey of small business conditions by the National Federation of Independent Businesses, a US trade association of small businesses. Its June survey reported improved credit conditions, capital spending intentions and hiring plans among survey respondents.
Keep in mind that the stock market is forward- looking. Even though economic activity in this corporate segment remains weak, emerging signs of improvement have the potential to boost stock market prices. I will avidly review the results of the next survey in mid-July.
On balance, I believe that much of the bad news worrying investors is probably already reflected in the current prices. But several morsels of good news have yet to be spotted. For this reason, I remain optimistic about near-term trading conditions.
This article originally appeared in FTMoney, which comes with the WeekendFT. For more FT articles about personal finance and investing, see www.ft.com/money.
