The UK stock market has rocketed up by 28 per cent in the past six months. 
And, in spite of this advance, I believe this rally has further to go.

The just-ended summer phase of the rally intrigues me. Prices spurted 16 per cent in July and August – the best summer rally in more than six decades. It brings to mind an interesting historical trend that optimists will enjoy. There were 14 other occasions in the last century when UK shares rose at least 8 per cent in July and August. Every one of these rallies occurred during a bull market. Most continued for at least a year. 

More importantly, no big summer rally in the last 100 years marked the very end of a bull run. The message from the past is quite clear. This year’s rally is far from over.

Nevertheless, I am becoming increasingly worried about prospects for the next month or so. One concern is linked to the size of the advance we have enjoyed since March. It is rare for prices to rise non-stop by this amount in a six-month period. The situation is becoming increasingly ripe for a brief retrenchment.

I fear the trigger for the next sell-off might be the US third-quarter reporting season. I expect Wall Street analysts to issue warnings in the next few weeks that some shares have risen a bit too steeply, given their short-term earnings prospects. Investors sitting on big 2009 profits might be persuaded to bank some profits.

Recent price swings in the UK could be a preview of what lies ahead. A flood of earnings reports were issued last week. Shares in some companies rose in advance of an announcement and then declined afterwards because the news disappointed City traders. Economic recovery may be approaching but progress at the company level is clearly not as fast as many investors expect.

Another concern is a recent survey of investor confidence. It found that fund managers are increasingly willing to move into shares. Such opinion shifts often come near the end of a stock market rally, not at the beginning.

The calendar also worries me. It is hard to believe that a single month can disappoint investors so often, but September fits the bill. Random walk theory fans believe systematic weakness linked to a specific point on the calendar is not likely to occur. But objective historical statistics going back for many decades prove the opposite. September turns in a weaker performance than most other months. 

Even during bull markets, history teaches that prices often rise in September if there was a loss in the previous six months or a moderate gain. Unfortunately, the trend following big gains in March to August does not make for pleasant reading.

There were eight bull market years in recent decades when the UK shares gained at least 9 per cent in the last six months. Prices continued to rise in September just once. The exception, in 1995, was a squeaker with shares gaining less than 1 per cent. 

The size of the price gain in the last six months makes this historical statistic a bit worrying.

Pulling it all together, the weight of evidence warns me to trade cautiously in the weeks ahead. For this reason, I have taken several steps to protect my 2009 profits. One defensive action was to open a spread bet on the FTSE 100 in order to profit from the decline that, I fear, will occur.

I also sold a number of shares in my portfolio. Most were from positions that had accumulated high profits. Others were losers. A good example of the latter was my sale of Havelock Europa shares. The company issued a very negative interim announcement on Tuesday which frightened the devil out of me. I knew that I was in trouble when I learned that a mid-morning statement had been released days ahead of schedule. Unexpected mid-day announcements often spell trouble – and this was no exception.

Havelock’s opening sentence set the scene with references to reduced revenues and a first-half loss. A few sentences later was the admission that activity in one division was the weakest in many years.

As regular readers will recall, I was quite optimistic about Havelock Europa prospects a few weeks ago. I was wrong. Instead of an expected “green shoots” story, Tuesday’s statement was a major profit warning. I sold my entire position within minutes of reading the announcement. It was not an enjoyable experience, but years of trading have taught me that a quick sale in this situation is often the least painful option.

Another sale was in Costain, the construction group. At first glance, its interim statement looked quite positive. A growing order book pointed to good times ahead. But closer reading showed that the pension deficit more than doubled in six months to £76m, a staggering increase. The company must make additional monthly pension contributions that could total a further £11m on an annualised basis. These will be a hit on the bottom line.

But even allowing for my concerns about the broad market, I remain quite bullish about some shares in my portfolio. An example is Asterand, a leading supplier of human tissue to the pharmaceutical industry. The company just announced that it broke into the profit column. Sales are up. Prospects for the future look rosy. There is no long-term debt. What could be better? 

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