History points to FTSE breaking out of its range

Volatility is a key feature of this bull market and it has become more pronounced in recent months. Sharp rallies and sudden reversals are occurring with increased frequency.

Sleepy summertime trading conditions have, so far, failed to alter this pattern. For example, the FTSE 100 gained 7 per cent in just 10 trading days in late-June and sharply reversed direction last week.

As my first chart shows, these volatile price swings disguise the fact that the underlying trend has been flat since last September: the FTSE 100 has been locked within a range of 5700 to 6100.

I believe two counterbalancing forces are at play. Investors keep getting spooked by fresh developments in the ongoing European financial crisis. Economic worries on both sides of the Atlantic add to these worries. But, at the same time, many UK companies continue to perform well. Analysts also expect US growth to rebound in the second half, after the economy suffered some temporary setbacks in the first half. This is an important positive because the UK stock market often follows Wall Street in the short-run.

History provides an interesting perspective, too. There were 28 occasions in the last century when the stock market traded within a range of -10 per cent to +2 per cent in the first half of the year. This year is the 29th in that series.

In 15 of those years, a bull market was still running at the end of June – and the second-half record in those years was impressive. Prices rose all but once, recording an average gain of 13 per cent. A bull market continued for at least another year in most of those years.

In the other 13 years, a bear market was in progress at the end of June. In those years, share price performance in the second half was dismal. Prices fell each time, with an average decline of 10 per cent.

Of course, forecasting the future from historical data are dicey unless you are sure of the underlying trend. My own view is that our two-year bull market has further to run. One straw to the wind is that prices currently sit near their bull market high despite catastrophic European financial conditions and pronounced economic worries in the UK and US. Clearly, there are strongly positive forces that are supporting prices in the face of significant negative pressures.

If I am right, the last nine months were merely a plateau, following the 2000 point gain on the FTSE 100 since March 2009. Further advances look to be on the horizon.

In my own trading activity, I often try to pounce upon an unloved share with rebound potential. A typical candidate would be a small company that is beginning to recover after going through some hard times. My interest generally increases if that company is off most City radar screens.

A good example is St Ives, the printing company. It is currently followed by a single City analyst. Limited mentions on private investor internet bulletin boards suggest that private investors have lost interest in St Ives, as well.

Its shares have been affected in recent years by the recession plus a growing consumer preference for e-books. Investors also associate St Ives with the publication of annual reports and other financial documents that are now often posted online.

But, under the surface, changes are beginning to occur. St Ives is reducing its reliance on traditional high volume, low-profit printing. It recently sold off its magazine printing division and is expanding into more profitable digital and marketing activities. One omen for the future is a recent long-term contract with banking giant HSBC, rumoured to be worth more than £10m per year.

According to house broker Numis, “normalised” pre-tax profit (profit after factoring out the recently sold magazine printing operation and several one-off expenses) is expected to come in around £25m for the year ending July 2012. A forward-looking price/earnings ratio of less than 6 adds to my interest.

St Ives share price chart provides another encouraging sign. Its shares have drifted sideways for many months and are currently approaching an important support line. All three recent approaches to this line were followed by rallies of at least 40 per cent.

Stock market historian David Schwartz is an active short-term trader writing about his own trades. Send any comments to tradersdiary@ft.com