As we enter the month of May, the S&P 500 has rallied a stellar 12% year to date, and a little over 14% since the important low in November 2012. Given the relentlessness of the rally in stocks, more than a few bears have likely lost their shirts as the improbable became reality. I often state that more important than technical analysis (which is best used for reference price levels) for the broader picture is to understand the current market structure. The market structure as I define it evolves around the market’s current focal point and driving force. For the time being this focal point and driving force remains the global central banks, which try and thus far have succeeded to inflate equity prices and bring investors back into the markets.
This experiment has over the past three years resulted in similar patterns in the S6P 500, year after year. Namely, stocks rally sharply into the April – early May period, after which they correct anywhere from 10% – 20% over the ensuing months. While the duration of the correction varied in each year, in the case of 2011 lasting all the way into October, the ‘sure-fire’ month to be expecting a pull-back has been May. Like Mark Twain said, history doesn’t often repeat itself but it does rhyme. As such we would be overly giddy to expect the same outcome again this May.
The question that investors who participated in the year to date rally should ask themselves, is whether their year to date gains are enough to take some profits off the table in return for a little rest on the sidelines.
In my mind, one potential scenario I could see play out is that the S&P 500 clears the critical 1600 area in coming days with a lift into the 1610 – 1620 area, before tricking out those looking to chase the index up to infinity and correcting by 5% – 7%