A Technical Take
By Serge Berger, The Steady Trader
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.
Broadly speaking, understanding the current market structure is more important than technical analysis (which is best used for reference price levels). 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 continue to inflate equity prices and bring investors back into the markets.
This three-year experiment has resulted in similar patterns in the S&P 500, year after year. Namely, stocks rally sharply into April / early May, after which they correct anywhere from 10% to 20% over the ensuing months. While the duration of the correction varied in each year — lasting all the way into October back in 2011 — the “surefire” month to be expecting a pullback has been May.
But as Mark Twain said, history doesn’t often repeat itself (even if it does rhyme). We would be overly giddy to expect the same outcome again this May.
So are year-to-date gains enough to take some profits off the table in return for a little rest on the sidelines?
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%.