INVESTORS are regaining their appetite for equities in the wake of generally positive second quarter earnings results, according to a fund managers’ survey conducted last week by financial information company Thomson Reuters.<br /><br />As a percentage of a typical balanced portfolio, equities were at their highest since the end of August last year, just a couple of weeks before Lehman Brothers collapsed, while the survey shows that cash holdings have been slashed to levels not seen since May 2007.<br /><br />Given that both the FTSE 100 and the Dow have been rallying strongly over the last two weeks, indeed at a much faster and sustained rate than analysts had expected, the question is now whether what was once considered a bear market rally has turned into the beginnings of a true bull market. Or are investors simply being too optimistic and setting the markets up for another plunge lower? <br /><br />This is a crucial question for spread betters to consider because it will determine how they play the market over the coming weeks and whether to start increasing the weight of indices and individual equities in their portfolio.<br /><strong><br /></strong><strong>BULL RALLY</strong><br />To assess whether this is indeed a bull rally or not, all traders should be focusing on how the markets test the key resistance levels in the major indices.<br /><br />Nick Mitchell, a dealer at CMC Markets, says: “With the recent rally looking set to continue, important levels on the upside maybe tested. All eyes are on the S&P as it approaches the 1,000 level, a break here would further reinforce the feeling that we may be on the cusp of a new bull market with the end of recession in sight.”<br /><br />However, Simon Denham at Capital Spreads says that after the FTSE 100’s good run higher to the 4,600 level, “it is hard to see further justification for buying if we don’t see some sort of a pull-back first”.<br /><br />“We’re at levels that formed highs in 2008 when the market tried to recover from the massive fallout in the fourth quarter of 2008, so sellers must be of the belief that those highs will prove too much for the index once again,” he adds. <br /><br />But spread betters should note that strategists are starting to become more positive about equities, and cyclical equities in particular, which provides further confirmation of the Thomson Reuters’ data. <br /><strong><br /></strong><strong>UNDERVALUED EQUITIES</strong><br />Back in mid-July, the Bank of America-Merrill Lynch fund managers’ survey showed that a net 20 per cent of investors saw equities as undervalued, while those overweight on cash holding dropped by 7 per cent from the June survey.<br /><br />BNP Paribas equity strategists currently believe that equities look attractive compared to government bonds – a clear indication of growing risk appetite. <br /><br />They say: “With equity markets near or at their highest level this year, market sentiment has turned more bullish this week. Bulls now outnumber bears among US retail investors and investment advisors.”<br /><br />But while Credit Suisse analysts are also becoming more bullish on cyclical stocks, they have not yet gone overweight on them because they deem them too expensive relative to the market as a whole and, more crucially, they are not optimistic about the medium-term economic outlook <br />They say: “We believe that the trend growth rate is lower because a lower investment share of GDP tends to lead to lower productivity growth, the demographics are clearly deteriorating and there is more red tape and regulation.”<br /><br />Spread betters focusing on the London market should look in the short-term to buy the FTSE 100 on any dips. But if the market repeatedly fails to consolidate the gains of the last fortnight – and slides lower again – then that will suggest the recent rally was over-extended. <br /><br />Optimistic bulls should beware – we are certainly not out of the woods yet and another fall is still a distinct possibility.