OPINION 

Summertime strength

Dominic Picarda

Upon a gate somewhere in rural England hangs an apocryphal sign that reads: "The farmer allows ramblers free access to this field, but the bull charges." The warning is equally relevant for retail ramblers in the stock market, who seem often to forget that the freedom to bet on falls should be used cautiously. The last few trading days have been a case in point. In the face of rampaging gains in the indices, as many as four-fifths of clients at one major spread-betting firm have been running short positions in the S&P 500 and DAX 30. The results cannot have been pretty.

S&P soars

While I do not agree with the short-sellers, I kind of understand their concerns. The mainstream financial press is littered with stories about the allegedly ominous lack of volatility today, as well as comparisons with the onset of the crisis in 2007. Investment bloggers note that it is now some three years since the S&P 500 suffered a 10 per cent correction, whereas they've typically happened every two years. And, I've read at least two more predictions this week that we're heading for a full-blown crash rather than a mere correction.

For all I know, these arguments may turn out to be right. I have no problem with the idea that the bull market will come to an end and perhaps quite a nasty one, too. I just cannot see the sense of opening short positions while the market is not only showing no actual signs of falling, but is actually rising very strongly. It really does seem like taking a stroll through the pasture within a few yards of a notoriously aggressive bovine, while wearing a flappy red anorak for good measure.

Having ended May at record highs, the DAX, Dow Industrials and S&P 500 have extended their run into virgin territory. I explained last week how new highs in the S&P 500 have tended to foretell ongoing good returns in the past, rather than market tops. A reader then emailed me to ask if this was the case even where valuations were as stretched as they are today. I have therefore adjusted my research to take account of cyclically-adjusted price/earnings ratios, a valuation metric that highlights the market's current dearness. You can read the results here - http://bit.ly/1qtOatT - but they essentially bolster the bull case right now.

Nikkei rising

Mid-cap marches on

What I find especially heartening right now is that some of the riskier indices are picking up strongly, alongside the broader markets. The mid-cap FTSE 250 has built further on its recent recovery, spiking impressively on Friday, 6 June. The technology-heavy Nasdaq 100 has blasted triumphantly to a fresh peak for the present bull market. Elsewhere, Japan’s Nikkei 225 is putting in its most convincing rally of 2014 to date, while a clutch of Coppock buy-signals have flashed up - see page 10. The earlier weakness of some of these markets was a key element with the bears' argument, so their present recovery is all the more significant.

Stretched tech

The strength of the current bounce has left certain markets looking overbought on their daily charts, especially the Nasdaq 100 and the DAX 30. Doesn't this heighten the near-term risk of some sort of dip? It is quite normal for equities to get overbought and stay overbought for quite some time during powerful rallies. This is certainly not a reason to sell up or, worse still, go short, as so many spread-bettors have been doing. That said, another mild retreat would do nicely for establishing fresh long positions. The bull has further to charge.

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