Since the first week of March the FTSE 100 index has rallied by around 13%. A decent gain, but as Mr FT has pointed out, there seems to be plenty of resistance to a decisive break above the 4000 mark. And sceptics aren’t persuaded that this is still a bear market rally before another leg down.

On the other hand, the FTSE 250, a broader index, has jumped a whopping 25% from its recent lows around 5780 in March, and is now trading around 7250. And that’s where most of my trading action has been. If you look back through my blogs since last autumn you’ll see that I’ve been steadily buying into risky, oversold and deeply unfashionable stocks. Interestingly the FTSE 250 has now got all the way back to where the market was at the start of October last year. This is a significant recovery and has provided plenty of excellent trading opportunities, despite nagging doubts about the sustainability of the rally over the next few weeks and months. I’m holding out for more upside. Why?

Mid caps have been hammered over the last 18 months and a combination of increased risk appetite, a more positive outlook, and short covering seems to have given the sector a boost. And that’s been very good news for my trading view.

Building Up A Picture
As regular readers will know, I like to take a view and give trades time to work. I start small, then add to my position over time. My basic view about what’s happening right now can be summarised as follows:

• We are in a deflationary environment. The G20 governments are doing everything they can think of to stop asset prices from dropping further. It may not work but there’s a tradable bounce that is worth exploiting.
• Sentiment towards equities has improved somewhat, partly because the data flow is ‘less worse’. Spare cash is going back into them. Corporate bonds seem like the other candidate for cash but the risk/reward ratio on oversold equities looks better to me.
• The ECB is lagging behind and as a result the recession could be longer and deeper in the eurozone, partly because of the ‘drag’ factor of eastern and southern European economies which have deep structural problems.
• The liquidity being put into the system is working through and a combination of fiscal stimulus and near-zero interest rates is having an impact on household incomes and company balance sheets (particularly banks). It’s a knife edge situation but public spending is just about keeping the economy moving. I was amazed by how packed full the trains were over the Easter weekend, and how busy the seaside was, which suggests that we’re not really in a 1930s style depression, despite rising unemployment.