LONDON (Reuters) - The FTSE 100 staged a late rally on Wednesday when shorts got squeezed by the continued resilience of the market on the back of rising investor confidence.
Britain's top share index closed up 20.73 points, or 0.3 percent, at 6,359.11, and touched an intraday high of 6,384.70 - its highest in five-years.
The index, however, fell short of its highest closing level since January 3 2008 with some late profit taking and strong resistance seen at 6,400, according to technical analysts.
The latest market rally has stretched back to November 19 2012 without a correction, squeezing the bears and fuelling the bulls' appetite for equities.
"As a house we feel more confident about equities and that the uptrend is going to continue for this year. After a fast start there may be some tracking back, but I think if that happens there is more money waiting in the wings to go into equities," Edward Bland, head of research at Duncan Lawrie Private Bank, said.
"There seems to be a unanimity around the world now that bond markets look overpriced and equities are the preferred asset class," he said.
The strength of the FTSE 100 may have caught out those investors who had been betting on a market pull-back last week, when short interest in FTSE 100 stocks spiked around 24 percent from the prior 30-days, according to data from Sungard Astec analytics.
"I have not spoken to many unequivocally bullish clients," said on London-based sales trader exposed to retail investors.
He said the spike in equity markets might have forced some under performing fund managers to spruce up portfolios.
"The fund manager thinks 'what shall I buy? Cyclicals. What has been going up? Miners and banks. What has been going down? Sterling'," the sales trader said.
Sterling has been falling since the start of the year against the U.S. dollar, a situation that has been exacerbated by the ongoing currency tensions at the G7 summit.
A weaker sterling actually supports the FTSE 100, with around two-thirds of the index's constituents deriving their earnings from outside the UK.
That it is particularly true of the miners, which were the strongest performing sector, up 2.1 percent on the day and up nearly 10 percent in the last 3 months.
Despite the rally equities valuations remain at a discount to historical highs - on around 12 times forward price-to-earnings and many trading below 1 times their book value, leaving some as potential takeover targets.
Miner ENRC up 3 percent on Tuesday, has rallied 26 percent over the last week as bid rumours refuse to go away.
Vodafone fell 1.1 percent on reports it weighing up a bid for Germany's Kabel Deutschland, leaving further question marks over its dividend outlook.
"(There is) limited scope for additional leverage at Vodafone while maintaining dividend cover," Simon Maughan, strategist at Olive Tree Securities, said.
Maughan said that while addressing it's lack of fixed line ‘back-haul' capacity by buying Cable & Wireless in the UK and TelstraClear in New Zealand, obvious gaps remain for Vodafone in Germany, Spain and Italy, and less pressingly in Holland and Portugal.
Elsewhere on the upside, Tullow Oil recovered some recent losses, up 6.8 percent after releasing a set of Kenyan well test results, which it said could lead to the country's first commercial production.
"Whilst this test rate exceeds prior guidance, some of this positive news should be in the price, with the stock trading up after disappointing announcements yesterday," Canaccord Genuity said in a note.
Reckitt Benckiser, maker of Strepsils throat lozenges and Mucinex decongestant, was up 1.3 percent after beating profit forecasts.
UBS provided a boost for Petrofac, which rose 2 percent after the investment bank upgraded the oil services firm to "buy" from "neutral" after recent underperformance following a profit warning from European peer Saipem.
IMI, meanwhile, fell 0.8 percent after UBS cut its rating to "sell" from "neutral", saying the company faces severe margin pressures in its service division, and is not as deserving of its new multiple as other engineers.
AstraZeneca, BP, Royal Dutch Shell and Sage Group all restricted further gains on the index after they traded without their dividend attractions.
(Written by David Brett; editing by Ron Askew)