Bull or bear – it's too early to say if rally is upturn

Published on Friday 20 March 2009 19:20

AFTER a sickening fall from the first trough of the credit crunch crash, the market has spiralled down yet further since the New Year.

All technical resistance points have been broken and just when it seemed like time to head for the hills for a decade or two, the markets around the world have rallied.

You have to be a super optimist to think this is the end of the credit crunch crash. However, mathematics and economics suggest you can never know one way or another. Bears are never satisfied by any fall, however large, while bulls take the merest hint of good news as proof that the market will go sky high.

So what are the clues to what happens next? Here are some factors to consider.

The stock market reacts to what investors think will happen in about a year's time, so that the price now reflects the state of the game in another 12 months as calculated by the hive mind of all investors great and small. The hive mind is a pretty smart cookie and has all available information to hand.

So far this bear rally is too strong to be a bull trend. Bull markets don't go up vertically, they dither along creeping ever upwards. Until the market starts to float up rather than charge ahead, a new trend is not established. This can be seen from daily volatility. Volatility is a measure of uncertainty in the market. The lower the volatility, the higher the confidence level that the market is sure of its direction.

Normally certainty is good for the bulls; uncertainty is fear and fear hurts share prices. If the volatility stays low in this rally, it is a positive sign but if it rises it suggests that the rally is based not on certainty but on other less useful factors.

While it often feels like the governments of the world make things worse, it must be said that the economic interventions of the last few months are on a historic level and it is hard to imagine that, at the very worst, we will not be inflated out of the current quagmire.

So what should investors do? If they are on the sidelines, now is a good time to consider slipping back in slowly, waiting for things to quieten down whilst fishing for the superb value lying around. Those that are already in should think about selling stocks that rally hard and instead flip into other stocks which are still languishing but have good potential upside. Meanwhile, textbook theory says we should continue to invest in good stocks and forget the current market action.

Myself? I'm thigh deep in a brand new portfolio that should earn me either a bravery medal or a sectioning under the mental health act.

&#149 Clem Chambers is chief executive of stocks and shares website ADVFN. His financial thriller – The Armageddon Trade – is published on 14 April and is available in hardback for 18.99.