Looking for a Summer Rally?

We all heard the cries of ‘sell in May and go away’, but that hasn’t materialized – at least for this month.  With only four trading days remaining it appears the SPX 500 and Dow Industrials may squeak out a gain (currently up a fraction in May) while the NASDAQ has been the leader and is up solid.  For all the complaining the Russell 2K has received it is about flat for the month.  Ironically, it has only really spent one full day in the green for May as it continues to chop around, but perhaps a bottom has been found in the 107-108 range on the IWM shares.   Sell in May?  That ‘saw may not work this time around.

But even with markets where they are, could a summer rally be achievable?  We’re still in a stock picker’s environment, market correlation is quite low and the recently beaten high beta names seem to be making a turn.  Oh, and there is volume – certainly suspect these days but that has been the case for many years, why should it be any different now in this Fed/liquidity driven market?

Market sentiment is certainly portraying a mixed picture.  Everyone seems to know volatility is muted, and at 11.5% the market is showing high complacency.  That can be a problem if the buyers are completely spent, but then we look at polls to see the bears are still registering fairly high numbers, and the put/call ratio is not too extended.  Breadth indicators like the McClellan Oscillator is showing a modestly overbought reading, which might take a turn down in the coming days.

So, if we are to get a rally this summer where might we look to find ideas?  With rates so low that will eventually trickle down to the home builder names, and certainly seeing some good news this past week on new housing starts was a good beginning.  The economy seems to be recovering from a ‘frozen’ first quarter and some stock moves are reflecting this optimism, but some may be getting ahead of themselves.

For instance, some tech stocks like Netflix, Apple and Oracle are at/near high levels – is there more buying in store?  Are these going to repeat as the ‘new’ leadership in this market?  Retail has been hit/miss lately but the higher end names like Tiffany, Nordstrom, The Gap and Macy’s showed growth and gave solid forward guidance, and we’ll hear from Michael Kors (released this morning) and Costco later this week.  Energy names like Anadarko, Oxy, Ensco and refineries like Valero, Tesoro and Philips continue to work and may lead the next upturn.

I would look for bonds to start giving back some gains over the next few months only if profit-taking would be the best reason.  Many expected bonds to sell off as the Fed started to taper but that clearly didn’t happen.  While everyone is astonished by the low yields let’s remember the curve is still upward sloping and portrays an economy growing, not contracting.  If we indeed see a strong Q2 number then expect that curve to steepen even further.

Many are looking for a good Q2 recovery but the back half of the year is the question mark.  We’ll have to see if the market is priced for a good move, the Fed expects to see 4% growth over the coming three quarters, a monumental task.

The Fed will have much to talk about during their June meeting.  Growth estimates may be revised a bit lower and since we have seen some inflation coming in the data that might start to enter the conversation in a serious way, in the jobs report (wages) and prices.  I don’t see a need for faster tapering to occur nor any need to discuss rate hikes happening soon, but there will be many talking points in this area to consider.