The 'New Normal' Leads Stocks Higher

Market Summary

A late Friday surge pushed the DOW Jones Industrial Average and S&P500 to close out the month of May at all-time highs. May was the best month for the stock market since February. The S&P 500 rose 2.1% for the month while the DOW gained .8% and the Nasdaq climbed 3.1%. The market trend is converting from neutral to moderately bullish.

We recently said “…investors fear has diminished to very low level, they have developed an appetite for risk…investors are moving out of the higher yielding utilities and Treasury bond sectors back into the high growth stocks like financials and technology…” You can call off the technology sector correction. In the beginning of March the tech-heavy Nasdaq 100 index dropped 7.50% over the next five weeks, but the index’s performance has actually caught up with the overall stock market. Including dividends, both the Nasdaq and general market are up approximately 4.3% on the year. Previous articles recommended identifying technology stocks you liked and bidding on shares that had dropped in price. The current bull market is officially the fifth longest on record and the graph below displays performance results over the past 30 trading days. After dragging stocks down in March and early April, the technology sector is now leading the market higher. Treasury bonds and real estate continue performing well as they have all year in a low interest rate environment.

   

Investor Analysis

Our previous comments about market action around Memorial Day, according to the Stock Trader’s Almanac “…the days after Memorial Day have been rather bullish. May was the best month from 1985 to 1997, some of this bullishness after Memorial Day can be attributed to the strength of the first two days of June…volume is often diminished and trading uninspired…” Last week was what some people refer to as a “thin to win” market rally because prices moved higher due to thin volume. Memorial Day officially kicked off the summer and last week’s volumes proved that point with the Dow seeing the lightest volume of the year. Expect the stocks prices to fluctuate between the current highs as resistance and moderate moves lower on lighter than normal volume as the markets settles into summer doldrums. While few people think stocks will go up indefinitely, there is a growing consensus that we’re in a new normal and part of that is extended long-term rallies. Everyone has their own market interpretation but two points are indisputable: 1) historically low rates and 2) the Fed is still providing liquidity through its bond buying programs. We live in an environment of stocks are the best game in town and big money knows it.

Both the DOW and S&P5 500 closed at the week at record highs. The Nasdaq moved up so rapidly that at this point you need to be careful when about entering long positions on tech stocks. Gold prices on Friday logged their lowest settlement in four months and suffered from their worst monthly decline this year as recent gains in equities lured investors away from the precious metal. “Gold has been trading in a compressing range since March with prices being supported by geopolitics, while the broad strength in stocks has kept pressure on precious metals,” said market analyst Tyler Richey.


Possible Strategy
Invest in the SPY ETF to take advantage of broad-based stock market gains. The SPY is an exchange-traded fund (ETF) managed to track the Standard & Poor's 500 Index (S&P 500). The investment seeks to provide investment results that, before expenses, generally correspond to the price and yield performance of the S&P 500 Index. By trading like a stock, the SPY has continuous liquidity, can be short sold, bought on margin, provide regular dividend payments and incur regular brokerage commissions when traded. The SPY is used by large institutions and traders as bets on the overall direction of the market. They are also used by individual investors who believe in passive management (index investing). In this respect, spiders compete directly with S&P 500 index funds.

Smart investors looking to benefit from the stock market recent price surge and limit the downside risk are stepping in to buy when prices pull back a bit so that they can get shares at a cheaper price. One theme that has been constant all year is investors waiting on price dips and then stepping in to bid the prices back up.

  

By Gregory Clay

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