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Bullish birthday

I doubt this weekend's gathering will be well attended. A lot of traders and investors disapprove strongly of the birthday boys, having suffered quite a few scratches and bites from them over the past five years. For the first year or so of their existence, I felt much the same. Since then, I have accepted them for what they are, and have tried to enjoy watching them grow up.

The S&P and FTSE's resilience this week has been especially impressive. Having sold off hard on Monday in response to Russia's incursion into Crimea, they clawed back their losses on Tuesday. The S&P has closed at yet new bull market highs, in line with my call. This is all very promising stuff, as I see it. But I will admit that I am not wholly without misgivings about the outlook.

FTSE rebound

In each of the last four summers, the indices have thrown a tantrum, two of them major. In all but one case, I turned a blind eye to their onset. I think there is a good chance we will see another one this year. Should the rally continue for now, as I expect it to, the markets could well enter the seasonally weaker May-October period in an overbought and overbullish state. If the Fed keeps cutting back on monetary treats it dishes out, we will have the perfect conditions for yet another little meltdown.

FTSE's summer tantrums

One of the best market-timers in the business is also fearful of a late-spring top. Richard Mogey (www.cmfinvestments.net) is one of the very few people I know who has a consistent record of calling turns in the market. "We favour a correction now, and then at least one more rally, with the earliest likely top coming in April 2014. We expect new highs near at least 1950 in the S&P 500 followed by a minimum of a 12 per cent correction."

S&P top projection

In order for this high to come about, Richard says the S&P needs to keep rising but for breadth to trail off. In other words, look out for a situation where the market hits fresh peaks but its breadth indicators are tracking lower. So far this is not happening. "We are at all time highs on the advance/decline line and the McClellan Summation index is too high for the start of a major decline."

S&P's healthy breadth

Another summer shakeout need not be terminal for the bull market, however. Especially if there is at least some newly-printed money still being pumped into the markets, I suspect a sell-off would lead to another significant buying opportunity in due course. My aim this time round will be to shift my longer-term holdings into cash and open short positions via spread bet once any downtrend begins.

I have also been thinking about the much longer term this week. According to James Montier, one of the finest strategists around, valuations point to possible real total returns of zero on the S&P over the next seven years. I've therefore had a look at how such returns might play out based on past experience. You can see my video and report here: http://bit.ly/1f6arpN. The bottom line is that the next seven years are likely to be very different to the last five. Don't let that spoil the birthday party, though.