Personal Finance: Fear is driving the bulls

Taking a break from the bustle of markets should provide the chance to distance yourself from events and gain a little perspective on business affairs. In practice, any perspective is usually eroded by the acres of required reading as you endeavour to catch up with a fortnight's worth of financial news.

This year's saunter around a number of islands certainly gave me cause to reflect. In Madeira I learned interest-rate worries had coaxed the bears back on to the street. By Guernsey it seemed the bulls were back in the ascendancy. Strolling the streets of St Helier, full of festive French making the most of May Day, I was inclined to the view that it was fear not greed that was keeping the market high.

Sellers were not much in evidence when shares took a tumble on the back of speculation over a rate rise from the Fed. We may have lost 100 points- plus here in London, but the real business came when bargain hunters emerged to pick among the debris of a drab day's dealing.

The fear is evident from the way in which professional managers are clearly worried about being out of the market. Two years and 40 per cent ago, some leading managers were pointing to an alarming rise in valuation levels. A number felt a correction was due and raised cash in anticipation of a setback that never happened. The underperformance of these leading managers is now a matter of record. Being left behind again is not an option.

It helps perpetuate a rather unhealthy scenario. Since 1963, Paine Webber, in the US, has published a graph of professional investors' sentiment. Known as the Bulls and Bears Sentiment, it classifies the opinions expressed in more than 140 market newsletters, produced by independent non-broking organisations, as bullish, bearish and correction. Correction consists of those investors who maybe nervous in the short term, but remain optimistic in the long run.

Their methodology is simple. By dividing the number of bulls by the sum of the total bulls and bears, they reach a percentage figure which gives a contrarian indicator for the market. A high percentage bull rate is an indication that a market top is about to be reached. Low, and you could be seeing a bottom.

One of my colleagues has used this system to great effect in keeping us all committed to the US despite widespread concern over the pace of the rise. The Index is now encouraging him to change his view. Suddenly, the bulls are all in the ascendancy - and it all coincides with continuing strength in the market. He now believes (as indeed the indicator suggests) the next move in prices has to be down.

If my colleague is right then it is no good trying to be clever about UK shares. We have seen how much the US and UK have been able to withstand the bearish sentiment that has arisen in the Far East. Whether we could hold out against bearish sentiment in the US is another matter entirely. US shares are worth more than three-times the value of all the Far Eastern stock markets put together.

So a correction looks to be on the cards. It all depends on the extent of any setback, but the nice warm relaxed feeling that remains with me from my holiday is not to be translated into buying frenzy, at least for the time being.

Brian Tora is chairman of the Greig Middleton investment strategy committee.