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Investors shrug off attempts to spook them

By David Schwartz
Published: May 27 2011 19:16 | Last updated: May 27 2011 19:16
T he European sovereign debt crisis appears to be losing its ability to spook UK investors.

The recent pattern has been for shares to suffer a sharp knee-jerk decline if fresh news about the crisis hits the headlines. Invariably, the decline quickly ends and is followed by a rebound.

It happened again last Monday in response to overnight headlines about a Greek default. The FTSE 100 fell steeply on Monday morning. The index flittered near this level for the rest of the day. It then bounced up in the next few trading days, regaining much of its lost ground.

Betting on a quick price rise after a short, steep decline triggered by a new default headline has become a short-term gamble worth taking.

Another development that catches my attention is the discrepancy between UK economic worries and a positive stock market trend.

Recent economic statistics are stomach-churning. They range from rising inflation and weak job prospects to disappointing GDP growth. Reports from retailers and construction companies, two important sectors, are depressing to read. But the stock market continues to hold its own. The FTSE 100 currently sits near its bull market high.

Some might think that the Footsie is an unreliable benchmark because it is dominated by multi-national companies with worldwide interests. But the price trend among smaller companies is also quite positive. The FTSE Fledgling index, based on 200 very small public companies, is near its all-time high. Prices are well-above the former peak that was reached mid-2007.

There are several possible reasons for the discrepancy between the economy and the stock market. We might be in a period when the stock market and the broad economy move in different directions. There have been many divergences of this type in the past. Another possible explanation is the perception among investors that shares are the best game in town in an era of low interest rates.

Also recall that the stock market is forward-looking while many widely-publicised economic statistics are backward-looking. The stock market might be signalling that all of the forecasts of economic malaise in the next few years is media hype, not reality.

Whatever the real reason, it is plain to see that today?s equity investor is not very concerned about the underlying economic trend.

Focusing on small UK companies, I just spotted a trend that might interest short-term traders. Prices of small company shares often rise near the beginning of June. The FTSE Small Cap and Fledgling indices each rose in 11 of the past 13 years from May 30 to June 5. The two exceptions occurred in bear markets. It is a good sign for the week ahead if you believe, as I do, that a bull market is still in place.

Turning to my own trading, I have sold my shares in Trifast (TRI) the manufacturer and distributor of industrial fastenings. I remain a fan of the company ? it is a good business with a new management team and good prospects for the future. But I notice that its share price has risen more than 600 per cent since the 2009 low and is approaching the 52p barrier. Chart patterns such as this one are often worth reacting to during periods of stock market uncertainty. I intend to return to these shares at a later date once the price sells off by a reasonable margin.

I also sold my shares in 600 Group (SIXH) after learning that it planned to shift from a full listing on the London Stock Exchange to the Alternative Investment Market (Aim). I held these shares in my individual savings account (Isa). It was a good investment, as the shares have doubled in price since I purchased them, and I was sorry to sell.

But the tax rules don?t allow Isa investors to hold Aim shares. Fellow columnist John Lee has written about this ridiculous situation on several occasions in the past year. However, the ?nanny state? lives on, despite last year?s change in government.

My assumption is that there will be steady selling pressure in the months ahead from other Isa investors who are forced to sell. Even so, these shares have the potential rise once the switchover occurs. This might be an investment to revisit later this year.

Stock market historian David Schwartz is an active short-term trader writing about his own trades. Send any comments to [email protected].