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The golden ratio

As rising share prices defy a bleak forecast, experts try to solve the puzzle

Last week’s Budget was as boring as I had expected. With the tax year just ending, now should be a good moment to look ahead. The trouble is that the horizon is clouded with uncertainty. If death and taxes are the only real certainties then we can at least be sure the greater majority of us will be paying more in tax from next week – not a prospect that pleases.

But despite the somewhat gloomy outlook, shares here continue to trend upwards. At least they were in the periods immediately before and after the Chancellor’s Budget statement.

It can hardly be the lower than expected borrowing figures – which are still horrendous and could well be revised in a less favourable fashion at a later date. Someone is taking an optimistic view.

Inflation could be the reason, although last week’s figures erred – just – on the positive side.

Nor do I believe it is investors backing a change of Government, since the polls suggest a weakening of the Conservative lead. Perhaps it is simply the unattractive rates being offered on bank deposits and the uncertain future for Government bonds, given the likely level of issuance.

The fact remains that even seasoned investors are scratching their heads as to whether we have seen a real turn in sentiment or are living in a fools’ paradise.

Does it really matter? One of the most successful investors I know pays scant attention to market timing and prefers to buy only those investments he is prepared to stick with through thick and thin.

Yet my ethereal in-tray is clogged with learned commentators trying to second-guess the immediate short-term direction of shares.

There is no shortage of indicators on which to draw. One technical analyst of my acquaintance has referred to the Fibonacci sequence as delivering relevant guidance. It would seem that the level achieved by the FTSE 100 index last week represented a rise of 61.8 per cent from the trough – a golden ratio for followers of Fibonacci.

Seasoned investors are scratching their heads as to whether we have seen a real turn in sentiment or are living in a fool’s paradise

For those not familiar with this approach to number crunching, Leonardo Fibonacci (or Leonardo of Pisa, as he was more properly known) was a 13th century mathematician who identified key numbers that, placed in a sequence, created relationships which could be expressed as percentages or ratios. So what, you might think, except these ratios appear to enjoy quite specific relevance in the natural world.

Needless to say, many people have used the sequence and the ratios they create in a number of varied applications with results that suggest they should not be ignored.

The behaviour of the stockmarket is just one such application, but chartists, as technical analysts tend more realistically to be called, are often evangelical about Fibonacci and the lessons that can be drawn.

Of course, there are a number of these ratios the market seems to have ignored in its wealth-rebuilding surge that has continued for more than a year. But 61.8 per cent is important, in Fibonacci terms. As it happens, the rise from trough a year ago to last week’s peak was around 65 per cent, but who’s quibbling over 3 per cent or so.

The fact remains that a rise of two-thirds or so in just 12 months suggests a pause for breath might be on the cards. Perhaps election fatigue will set in and we will all have time to take stock.

Brian Tora (brian.tora@ is principal of the Tora Partnership


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