US markets rallied with greater than one percent gains to close higher for the third consecutive month. Stocks shifted between gains and losses for much of the day before bolting upward in the last thirty minutes of trading on no significant news in the final hour of trading. Dow gained 4.06% in May which was noticeably smaller than increases in March and April of 7.35% and 7.73%, respectively. Overall, the Dow is down 3.15% on the year-to-date while the S&P500 etched a small advance of 1.76%. Meanwhile, the NASDAQ leads the three markets with a 12.51% gain on the year as the tech heavy index recovered quickly on the resiliency of technology giants including Google, Microsoft and Apple.
Traders have begun to grow cautious in equities following greater than thirty percent advances off early March lows. Specifically, the Dow has rallied 29.83% while the S&P gained over 35.86% along with a rise of 39.86% in the NASDAQ. Such rapid moves were built on a resurgence of risk appetite as financials began to stabilize and traders dismissed fears of nationalization for major banks. Adding to this, significant fiscal spending and monetary easing is beginning to show in increased demand for commodities and a rise in jobs of exporting nations including Australia and Canada. Hope has begun to rest on emerging nations even as the world’s largest economy has not shown significant improvement. Investors have instead focused optimism on releases that were “less-bad” in non-farm payrolls along with a significant rise consumer confidence.
[U][B]Will the Rally Suffer a Pullback in the Months Ahead?[/B][/U]
The three-month return of the Dow Jones Industrial Average at 11.72% (and the sharp thirty percent return off the early March 9 low) has caused many investors and commentators to question whether the rally will fizzle out in the months ahead to selling pressure. Confidence remains on growth in the latter half of the year while equity markets, which typically trade ahead of economic data, may already be pricing in growth ahead. While price action alone may dictate movement as technical analysis states, research from over six decades of data has shown that large increases are not necessarily followed by large declines. The chart below shows percentage gains in the three-month period from March through May and the percent change in the following three months, June through August. The hystery over the phrase “sell in May, go away” is in this case incorrect as markets tended to extend gains in more cases than not. Since 1970 in fact, there have been six years with double digit percentage gains between March and June and only one of which, 2007, led to a decline of 1.98% in the following three month period. Gains in the five years that rose varied from a minimal 0.37% in 1975 to a 6.39% rise in 2003. However difficult it may be to determine which direction stocks will ultimately take, those adamant that a large run-up will lead to a large pullback may be sorely disappointed.