Buyers of shares should beware when long-term bulls turn bearish. Now some are predicting a sharp stock market correction this summer.
Of course, there will always be pessimists, predicting doom and gloom, but when die-hard equity optimists turn squeamish it may really be time to worry.
Now, after one of the biggest share price rallies in recent decades – the FTSE 100 has risen by more than 40pc over the last year – some equity enthusiasts are quietly slipping away from the party.
Alan Steel, one of the few independent financial advisers (IFA) who was still advocating share-based funds in 2003 when the Footsie had fallen to a decade-low near 3,200 is one.
He said: “I’m turning a bit bearish but my caution is short term – three to four months of defensiveness, banking the biggest gains from small caps and emerging market winners because any short term correction will hit them hardest.
“I’m 63 now, so I’m trying to be sensible. There are conflicting signals out there which suggest that, after such a huge upward movement in world equities, a breather looks imminent.”
The Linlithgow-based IFA points to American analysis of one, four and 10-year cycles in the Dow Jones Industrials Index by Ned Davis Research which seeks to measure stock market trends in the context of seasonal and political factors. This suggests a sharp short-term correction will occur in the world’s biggest stock market within the next few months.
Mr Steel emphasised that he believes shares and share-based funds remain the best way to accumulate capital and generate rising income over the medium to long term. But he added: “Remember, you do not tend to get two consecutive good Scottish summers and nor do you tend to get two consecutive good summers in stocks.
“Progress is not linear; it goes round in circles. In the short term I’ve taken gains from my big winners such as small caps, commodities and emerging markets, and switches them to defensive funds with a focus on global mega caps.”
Specifically, he favours M&G Global Dividends, Troy Income and Invesco Perpetual Income funds where decent yields offer immediate comfort and the fact that companies with large stock market capitalisations have not seen such sharp share price appreciation as smaller caps may provide some protection in a downturn. ....
Dividends are often overlooked when investors concentrate on changes in the capital value of shares or indices. But, over the last 20 years, the income paid by shares substantially increased total returns.
For example, gross dividend income more than doubles the total return from the FTSE 100, compared to the price-only index, and dividends delivered 53pc of the total returns from the Dow Jones Index.
Quote courtesy of The Telegraph on-line, 19 April 2010
