We all know the yearly refrain of “Sell in May and go away!” but that mentality hasn’t materialized – at least not this year.
With only four trading days remaining, it appears the SPX 500 and Dow Industrials may squeak out a gain (currently up a fraction in May), while the Nasdaq continues to lead and stay solid in its gains. Despite all the complaining aimed in its direction, the Russell 2K has stayed pretty flat during the month. (Ironically, it has only spent one full day in the green for May as it continues to chop around, but perhaps a bottom has been found in the 107-108 range on the IWM shares.) Sell in May? That old saw may not work this time around.
Even with markets where they are, could we see a summer rally? We’re still in a stock picker’s environment. Market correlation is quite low, and the recently beaten-and-battered high beta names seem to be turning around. Oh, and then there is volume, which is certainly suspect as an indicator these days, but that has been the case for many years. Why should it be any different now in this Fed- and liquidity-driven market?
Market sentiment is certainly portraying a mixed picture. Everyone seems to know volatility is muted, and at 11.5% the market is showing high complacency. That can be a problem if the buyers are completely spent, but then we look at polls and see the bears are still registering fairly high numbers, plus the put/call ratio is not too extended. Breadth indicators, like the McClellan Oscillator, are showing a modestly overbought reading, which might take a turn down in the coming days.
So, if we are to get a rally this summer, where might we look to find ideas? Low interest rates will eventually trickle down to the home builder names, and, coupled with the good news this past week on new housing starts, that is one sector to watch.
Additionally, the economy seems to be recovering from a “frozen” first quarter, and some stock moves are reflecting this optimism, but some may be getting ahead of themselves. For instance, some tech stocks like Netflix, Apple and Oracle, are at/near highs, but we have to ask if there is more buying in store. If there is, will these names reclaim their place as leaders in this market?
Retail has been hit-or-miss lately, but certain names, like Tiffany, Nordstrom, Gap and Macy’s, have shown growth and momentum; we’ll hear from Michael Kors and Costco later this week. Energy names, like Anadarko, Oxy, and Ensco, and refineries, like Valero, Tesoro and Philips, continue to work their way up and may lead the next upturn.
I would also look for bonds to start giving back some gains over the next few months, but only if profit-taking is a possibility. Many analysts expected bonds to sell off as the Fed started to taper their buying, but that clearly didn’t happen. While everyone is astonished by the low yields, let’s remember the curve is still upward sloping and portrays an economy growing not contracting. If we indeed see a strong Q2 number, then expect to see that curve steepen even further.
There is a lot of talk around a good Q2 recovery, but the back half of the year is the real question mark. We’ll have to wait and see if the market is priced for a good move. The Fed expects to see 4% growth over the coming three quarters – a monumental task.
Speaking of the Fed, they will have much to talk about during their June meeting. Growth estimates may be revised a bit lower, and since we have seen some inflation coming in, the jobs report (especially around wages) and prices might start to enter the conversation in a serious way. I don’t see a need for faster tapering to occur, nor any need to discuss rate hikes happening soon, but there will be many talking points in this area to consider.
Any questions about my technical take on the markets? Ask away in the comments below!