Such a temptation must be resisted. History tells us that, if anything, the high level of the 250 relative to the 100 is a warning sign.
I say this because the correlation between the 250/100 ratio and subsequent annual changes in UK manufacturing output is actually negative - minus 0.19 in monthly data since December 1985. If anything, a high 250/100 ratio portends weaker growth. For example, the ratio fell in 2002 - just before the economy picked up - but rose in 2006-07, just before the recession.
Yes, there are reasons to expect an economic recovery. But the high level of the 250 relative to the 100 is not one of them.
Instead, it might be a sign that share prices are too high.
Since 1985 there has been a negative correlation between the 250/100 ratio and subsequent annual moves in the All-Share index. A high 250/100 ratio tends, more often than not, to lead to both the 250 and 100 falling over the following 12 months.
This implies that the 250 is not so much a leading indicator of economic conditions as a contemporaneous measure of investors' sentiment. The 250/100 ratio tends to rise when shares generally rise. But the problem with sentiment is that it sometimes rises and falls too far. Just as foreign buying of US equities - another sentiment indicator - can predict annual equity returns, so too can the 250/100 ratio.
Now, this doesn’t mean we should rush out to sell. The correlation between the 250/100 ratio and subsequent annual changes in the All-Share index, although negative, is quite small, at minus 0.15 since 1985.
What it does mean, however, is that movements in the 250 relative to the 100 are another piece of evidence in favour of the hypothesis that markets are sometimes irrational. Insofar as mid-caps are telling us anything - and the data is of course noisy - they are telling us that we should be wary of equities on a 12-month horizon.
