Recent days have seen a strong rally in the stock market. The FTSE 250 rose 13 per cent in seven trading days from a low of 8164.9 to a high of 9233 and is trading around 8848.1 currently. We may have seen the bottom of the bear market but there are plenty of reasons to remain cautious.
Fast and furious rallies are typical of bear markets as bargain hunters rush to buy and short sellers cover their positions. It is the opposite of sharp bursts of profit taking in a bull market. The whole move looks like a bear market rally. On 13 May, about 10 weeks ago, the FTSE 250 was 10,628; even after its strong rally it is nowhere near recovering the lost ground.
The nine month moving average, which turned down in late 2007, confirming a bear phase, is trending steadily downwards and is currently around 10,000 so, even at these levels, shares are still oversold.
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