Put simply, this refers to the fact that investors, predominantly of a professional nature, have polarised into two camps. The bulls believe the rally is fully justified, and have participated in it. The bears consider the market has got too far ahead of itself as the price of Government and central bank intervention has yet to be calculated and economic indicators are still mixed.
The pain is being felt by the bears. With any setback being seized as an opportunity to rebuild equity positions, it is clear they are being forced to commit to purchases despite any inherent caution they may feel.
I sympathise. The recovery really has continued far longer than I felt possible. Perhaps we are building a trap for the unwary, but it still feels dangerous to be out right now.
Soon we will be in September, not always a kind month for investors. October has had its moments in the past, too. Make no mistake, cries of “I told you so” will resound if a proper setback does take place. But there are those who believe the recovery has further to go yet – both this year and next. What is a poor investor to do?
For one thing, I hope they have dumped the gilts into which they comprehensively fled as panic money sought safe havens. Some correction has already taken place. The benchmark five-year gilt, Treasury 5 per cent 2014, as an example, peaked at £115 per cent in early March, roughly coinciding with the low for the equity market. It has fallen back to £109 per cent and yields a modest 3 per cent, if you take into account the fact that you are guaranteed to lose money if you hold it to redemption.
Interestingly, corporate bonds have comprehensively outperformed gilts over this period. Many funds have returned equity bull-market numbers. Dismiss this as an unwarranted rush into riskier assets if you will, but it was not so long ago that corporate bond funds were being talked about as the next big misselling scandal.
What is important now is to determine what might happen rather than dwell on missed opportunities.
Last week, both France and Germany came out with surprisingly robust economic numbers. True, the governor of the Bank of England was talking down the strength of the UK recovery – and unemployment figures demonstrated how vulnerable we remain – but investors took heart and welcomed yet another set of green shoots.
I remain convinced that profit-taking will set in at some stage – markets never move in a straight line – but it does rather feel as though a new trading range has been established. We should welcome this, of course. We should also retain a healthy scepticism and not get too carried away. Flexibility may prove useful in the weeks and months ahead.
Brian Tora (email@example.com) is principal of the Tora Partnership