The bulls are in a china shop as this fragile rally threatens to crash

The bulls took control again on Friday, propelling the FTSE 100 to a new 10-month high as we followed the US markets upwards. OK, volumes remain thin, but this rally is nevertheless developing some real momentum.

By Richard Fletcher, Executive Editor, Business
Published: 8:52PM BST 21 Aug 2009

Comments 18

So much for that old stock adage: Sell in May and go away. Stay away till St Leger's Day.

The 2pc-plus rise over the last week means that we are now up more than 30pc since the market touched a low of 3,512 on March 3.

While the natural bull inside me enjoys watching the market tick higher and higher week after week, even I have to admit that this run is looking increasingly fragile with the FTSE 100 now trading on a price earnings ratio of more than 60, the highest level since 2002.

Yes, stock markets are forward-looking but it's still difficult to reconcile Friday's near 100-point rise with the dire public finance figures published on Thursday. The massive deficit was a timely reminder of how bumpy the road to recovery will be.

Usually a bumper month for corporation and income tax receipts, the Government ran up an £8bn deficit in July, as tax revenues collapsed and benefit payments soared, putting the Chancellor's optimistic Budget predictions at serious risk.

Economists fear that government borrowings could now reach £200bn by the end of the year – some £25bn more than Alistair Darling forecast in April.

As Michael Ben-Gad, deputy head of economics at City University, so eloquently put it on Friday: "Whoever gets into government next will have to make very large cuts in services and also raise taxes. You'll end up with US levels of services and Scandinavian levels of tax."

Not surprisingly even the most bullish are getting nervous. Only last week Crispin Odey – the founding partner of Odey Asset Management who made tens of millions on the way down for clients and then repeated his success on the way up – warned of a pull back.

This rally, I fear, may have run too far.

http://www.telegraph.co.uk/finance/comm ... crash.html