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Sheepish bears

S&P shoots up

Yet again, the dumb power of the Federal Reserve's cheap money programme seems to have trumped the wizardry of the Elliott-wave patterns, Gann angles, sunspots and all the other weird and wonderful devices that inspired the bears to declare that the bull market was dead. In reply, a couple of prominent prophets of doom have gone tactically taciturn, while others have intensified their oft-repeated warning that "it will all end in tears".

Another bullish development could happen fairly shortly. Unlike the S&P 500 and the Dow Jones Transportation Average, the Dow Jones Industrials has not yet reached new all-time closing highs. According to the Dow Theory - which is a scientific approach to gauging Wall Street's trend - the bull market will be "in the clear" if this happens. "The market is not out of the woods until new highs on the Industrials confirm those set by the Transports," say the Theory's leading exponents (www.thedowtheory.com).

Industrials lagging

Hearteningly, the Nasdaq 100 and FTSE 250 have both sparked back into life in the past couple of sessions. The latter's bounce on Tuesday, 2 April reversed the downtrend that it had briefly entered on its daily swing chart. I had never paid the sell-signal any heed. As I wrote in last week's column, the decline was in my mind of the periodic pullbacks that we have seen several times since last summer. The rally towards 17000 that I mooted seems now to be under way.

FTSE 250 buy-signal

Nasdaq surges

Beyond the next few weeks, I readily admit that more of a correction may be in store. First, seasonality will turn against equities come May. There has been some sort of a shakeout in each of the past five summers. I imagine this year will be no different. The main question is whether we get another trivial one, like the 7.5 per cent drop in the S&P last May-June, or a more substantial one such as the 17.1 per cent tumble that the index suffered back in 2010.

The US political calendar is another reason why a correction may unfurl on Wall Street, and therefore over here, too. This year sees mid-term elections in America. In 10 of the last 13 mid-term election years going back to 1962, the S&P has corrected by at least 14 per cent. The typical pattern is said to be a slide starting in the springtime, with a bottom in the autumn, followed by a strong rally.

The last mid-term election year was 2010. True to form, the S&P had a big correction that bordered on becoming a bear market. More influential than the electoral cycle was the withdrawal of the first round of quantitative easing (QE). This year, we not only have the November poll, but also the withdrawal of the latest instalment of QE. It is easy to see why turbulence may occur not far in the future. For now, though, all the facts point to further near-term upside.