In my recent article from early April, I mentioned that “Over the next four to six weeks, we could see a rally in stocks that takes the Nasdaq Composite back to new highs and the S&P 500 to 4200.”
The excellent news is that the indexes reached these targets. The unhealthy information is that April was a troublesome month for a lot of progress shares. From right here, certainly one of two issues ought to occur. Either progress shares stabilize, resume increased, and raise the remainder of the market with it, or the latest weak point beneath the floor will carry down the total market. I’m leaning in direction of the latter. The market will give back its April gains over the subsequent two months for the following causes.
1) I’ve all the time believed that it’s not the information, however the market’s response to the information that’s extra essential. Over the final two weeks, many Mega Cap progress shares introduced excellent earnings and nonetheless offered off after their stories. If you hypothetically had the earnings stories of Amazon (AMZN), Apple (AAPL), and Microsoft (MSFT) upfront, you by no means would have imagined that they might all shut damaging the subsequent day. This response confirmed me that large establishments are at present promoting into energy.
2) May and June (particularly the second half of June) are typically difficult months for the market. After the first week of May, roughly 80% of S&P 500 firms can have reported their earnings. The information cycle will then shift away from fundamentals to politics, rates of interest, and any geopolitical issues. Speaking of rates of interest, as the financial system slowly will get back to regular, it wouldn’t shock me to see the 10-year yield return to its ranges from January 2020 (round 1.8%-2.0%). If this occurs, it’ll result in additional compression in the multiples of progress shares.
3) The IRS deadline for submitting tax returns was prolonged this yr to May 17. We will seemingly see tax promoting previous to this as a result of 2020 was a powerful yr for the markets, and many individuals can have capital gains taxes to pay by this date. On a associated observe, the new administration appears decided to boost taxes, particularly capital gains taxes. I don’t imagine they are going to get any of those new proposals accredited, however the steady headlines may preserve some strain on the market over the near-term.
4) The S&P 500 (^GSPC) traditionally averages a 10% return per yr. So far this yr, it’s up over 11%. It wouldn’t be unreasonable to see a traditional correction or some technical digestion earlier than heading increased later in the yr. Also, since 1980, the common intra-year correction is -14.3%.
5) A number of sentiment measures are displaying excessive ranges of bullishness. For instance, the newest NAAIM Exposure Index, which measures publicity by lively funding managers, is at its highest stage in over two months. Any minor pullback would shake out a few of this extra bullishness, as buyers are nonetheless fast to hurry out the door when the market begins to drop.
I wish to stress that I’m not turning bearish, simply cautious over the near-term. There are many robust components in the market’s favor from now till year-end. The financial system continues to return to regular, earnings are enhancing, and the Fed remains to be offering an incredible backdrop for the market. They should not elevating charges anytime quickly, nor are they slowing down or “tapering” their bond purchases. This will proceed to supply an fairness pleasant atmosphere into year-end. I merely suppose over the subsequent two months, a 4%-6% pullback can be regular and nothing out of the odd. The greatest approach to describe my present stance is short-term cautious however nonetheless longer-term bullish.
This is the place market members have to make choices primarily based on their very own timeframe and funding targets. If you may have a longer-term horizon, keep on with the development, and settle for some regular corrections alongside the method. If you’re a shorter-term dealer, utilizing lighter positions may assist scale back volatility, particularly if progress shares appropriate higher than the market. Either method, if we see a pullback over the subsequent two months, it’ll arrange some robust alternatives into year-end. Good luck!
I may be reached at: jfahmy@zorcapital.com
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