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Uptrend intact

Land of the sinking stock

Having failed to follow the script for the first four months, might they buck their seasonal tendency towards weakness between now and the autumn? The S&P 500 has suffered some sort of shake-out in each of the last five years of the present bull run, three of them greater than 10 per cent in magnitude. In 2014, the odds of such a correction seem higher still, given that this is a US mid-term election year, when the market has tended to peak in late April and bottom in early October.

Too few bears

The consensus among pundits remains stoutly optimistic, nonetheless. More than half of those polled in the latest weekly Investors Intelligence survey are bullish on the outlook, while barely one-fifth are bearish. The bears have been at similarly low levels for months on end. Such complacency merely adds to the case for some downside before long, along with overvaluation, the end of quantitative easing and overbought momentum.

Almost 'in the clear'

Despite all this, the US markets are actually closer to giving positive signals than negative ones. The bull market will be 'in the clear', according to the venerable Dow Theory, if the Dow Industrials can close above its 31 December level of 16576.7. It was a mere 40 points or so shy of doing so as of Tuesday 29 April. Given my respect for this proven approach to timing Wall Street, it would be hard for me to ignore this development, if it happens.

Uncracked CAC

The swing charts - to which the Dow Theory is related - could also turn bullish very shortly. The S&P 500 merely needs to make an intraday high above 1884.9, the Dow above 16565.7 and the tech-heavy Nasdaq 100 above 3613.2. Our own FTSE 100 has already gone back into an uptrend on its swing chart, while the likes of Spain's IBEX and France's CAC gave buy signals a month ago. The bull market is therefore clearly still intact.

On an intraday basis, I have already been recommending buying the indices since I came back from my holiday at the start of this week. And I would certainly follow a Dow Theory 'in the clear' signal and fresh swing-chart buy signals, if they happen. One scenario that occurs to me is that we see a short-term burst of strength lasting a couple of weeks or so, and then a correction sets in, just as everyone is getting bullish once more. For the moment, I am staying optimistic, though.

I have just come across another interesting reason why the FTSE may have a tough time in store further out. The valuation of UK investment trusts has reached the sort of levels that have given way to negative annual returns in the past - http://bit.ly/1n1BBVz. Worryingly, these were all pretty serious declines, as in 1987, 2000, and 2007. But even if this warning is right, I would still wait for the downtrend to get under way before even contemplating shorting.