My long-term stock market view remains positive. I expect this bull market to eventually peak at a higher level.

But my shorter-term expectations have become increasingly negative. Two factors cause this shift: the size of the recent rally and the upcoming election.

UK share prices have risen 26 per cent since the last minor sell-off ended in July. They have risen 48 per cent since the bull market began in March. I view both figures as too much, too soon.

Rallies such as this one warrant a yellow warning flag in my book.

Recent gains were boosted by the US third-
quarter earnings season, now in full swing. Given the stock market’s tendency to discount future events, I fear that much of the good news on earnings is now in the price. If so, shares are unlikely to rise much further until fresh positive news emerges. In the interim, experience warns me to beware of a partial pullback after the steep rally.

Another important issue is the upcoming UK election. Political experts expect it to be held about six months from now.

History provides some useful lessons about elections. Decisive wins are virtually always preceded by big stock market gains in the six-month run-up to election day. But small majorities are often associated with market losses.

The difference between the two is striking. There were five elections in the last half-century when the winner’s majority was fewer than 20 seats. Shares fell in the six-month run-up four times. The average decline was 15 per cent

Nine other elections saw the winner emerge with a majority of at least 20 seats. Shares rose eight times in the preceding six months by an average of 15 per cent.

Investors clearly do a fine job of anticipating election results. I find this worrying because the Tories are currently expected to win the next election by a small margin. Some experts even warn they might not win a majority. This could lead to government paralysis.

The six-month election countdown starts just about now. I believe the odds favour a share price dip. When it starts and how big it will be is anyone’s guess. 

Might this election be an exception to the rule? So far, signs suggest not. The government’s main focus is on getting re-elected, not making the best decision to solve a major economic crisis.

Its recent scheme to sell £16bn of assets is a good example. There are several problems with this decision. Some of these assets are currently profit-making and selling these will reduce future revenues. Taxes must rise still further to compensate.  Government sources also admit that most of the money will be spent immediately and not used to reduce a massive and growing debt pile.

Timing is another error. Homeowners know it is common sense not to sell property now unless it is an absolute necessity. A better price might be gained by delaying until the market improves. But a panicked government is not using common sense.

We must not forget that market timing is not one of its talents. Recall the decision to sell off the nation’s gold hoard a few years ago. Gold prices have more than doubled since then.

But the biggest issue is that the assets sale is a one-off headline-grabber that does not address the basic problem. We are living beyond our means and must raise taxes and cut spending. Unfort-
unately, these actions might be vote-losers.

The Conservatives may or may not have the stomach to make difficult decisions if they win the next election. We must wait and see. But for the moment, they probably will not talk too tough, except in very broad terms, because they too do not want to frighten potential voters.

The bottom line is that we must expect a period of aimlessness in the next six months. This raises the odds of stock market weakness.

In spite of my pessimism, the stock market continues to rally. I deal with this conflict between expectation and reality by reducing the size of each trade and keeping a substantial portion of my capital in cash.

But I do open fresh positions when something noteworthy occurs or the City is tardy in responding to positive news. A fine example that ticks both boxes is a favourite share of mine: Porvair, the specialist industrial filters group.

The company issued a positive trading update last week. It is enjoying a return to growth after being slammed by the recession. But its shares were unchanged on the day. In fact, only six trades were conducted during the entire day.

There are many new positives to the Porvair story. Alcoa, the aluminium giant, surprised investors last week with booming third-quarter earnings. It is not widely known, but Porvair provides all of Alcoa’s filters. As Alcoa increases production, Porvair benefits.

The price of $1,500 per tonne is a magic figure in the aluminium industry, the breakeven price for processors. When prices rise above this level, production increases – as does usage of Porvair filters. Prices are currently approaching $2,000 tonne.

A European competitor recently upped its stake in Porvair to 22 per cent. With a holding of this size, coupled with sterling weakness, a sudden takeover offer is possible. Customers are reacting positively to new products. No matter where I look, the message is the same. Prospects are promising.

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