In the round
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The answer is probably yes - and for two reasons. First, breaking through a notable number, whether on the upside or the down, draws attention to the market in question. Such an occasion invites headlines and gives all and sundry the excuse to speculate on what will happen next - which is why I feel inclined to wrap up on this as swiftly as I can and turn to a different topic.
Second, figures can be significant for technical analysts. Whether or not you put any faith in charts, the fact remains that many investors do and some pictures do seem to repeat themselves. As it happens, chart breakout - or breakdown - signals do not necessarily occur when round numbers come into the equation but it is remarkable how an index traveling through a psycho-logical figure encourages chartists to throw in their lot with all the others pontificating on what might be in store.
Psychology does matter, too, although the effect it might have on subsequent movements is not always easy to predict. Some investors will feel more comfortable buying into a market that has returned to bull market conditions. Others may well take the breaching of a perceived barrier as an opportunity to take profits. You pays your money and you takes your choice. Personally, as much of this psychology is wrapped up in chart signals, I feel inclined to ignore them and concentrate on the fundamentals.
It happens that last week had a few signals of a fundamental nature. I could hardly miss them. Arriving before dawn at the BBC, I learned that two quality newspapers had headlines declaring the recession to be over. Would I like to comment? You bet! For those of you who did not hear my remarks that morning or in any of the repackaged pieces that appeared to pop up in news bulletins all over the place, let me tell you I took little pleasure in pouring cold water over the news.
It's not that I doubt the veracity of the data on which these stories were based. Rather, I fall into the camp that believes two swallows do not a summer make.
It was the National Institute for Economic & Social Research that had announced an increase in output for the three months to August. Hooray! But one cheer only, I'm afraid. The increase was in manufacturing output - encouraging, but hardly the whole story. Services are vitally important to the UK economy - financial services particularly so.
It happens that the signs are building that a recovery of some sorts is happening. But with increasing Government indebtedness and doubts over how robust this bounceback will be, I believe a degree of caution still in order.
The Bank of England clearly agrees. Not only were rates kept on hold last week, quantitative easing was resumed. We need more evidence before popping the champagne corks. We may not get it that swiftly.
Brian Tora (brian.tora@ centaur.co.uk) is principal of the Tora Partnership
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