How the Stock Market Staged a Rally and Not a Meltdown This May

How the Stock Market Staged a Rally and Not a Meltdown This May image 040613 PC leongStock Market Staged a Rally and Not a Meltdown This MayMay was supposed to a dud, according to the Stock Trader’s Almanac. In 2012, the month of May was a disaster, with the Dow and the S&P 500 plummeting 6.21% and 6.23%, respectively. The technology and small-cap sectors fared even worse, with the NASDAQ and Russell 2000 giving up 7.19% and 6.74%, respectively, in May 2012.

Fast-forward a year, and this May has been blooming for the stock market. The key stock indices recorded excellent gains, with the NASDAQ staging its best month in over a year.

The reality is that in spite of several days of selling in mid-April, the current upward move in the stock market this year really hasn’t faced any hurdles, which is a surprise.

In fact, we have yet to see sustained selling or a down month this year, with the exception of the 0.42% decline posted by the Russell 2000 in April. Small-caps came back with a vengeance in May, advancing nearly five percent.

And there will likely be more highs and records in the stock market to come as long as the Federal Reserve and other global central banks continue offering easy money and driving down interest rates. And if 2012 is any indication, it’s looking like full steam ahead.

In 2012, the stock market staged a strong rally following the May meltdown, reporting gains in each month from June to September.

Now, I’m not totally convinced this pattern will happen again this year, but the investment climate as far as the economy and easy money is better than it was in 2012.

The only thing that concerns me is that I just don’t see the current rate of the stock market advance keeping pace. If this were to happen, the Dow would end up with a 41% gain, while the S&P 500 would have advanced 38%. Honestly, I don’t see this happening, which means we could likely see some hesitancy over the next several months—or at least a stock market correction of some meaningful magnitude.

I would view a stock market correction not as a red flag, but as a buying opportunity to jump in and accumulate additional positions. My belief is that this stock market is heading higher.

The only thing that could derail the bull market is the Fed, especially if it decides to pare down its bond buying, which would force longer-term yields higher.

In addition, I’m concerned about the bubble-like conditions in the Japanese stock market, where I feel stocks are extremely vulnerable to more selling. (Read “Why Nikkei Sell-Off May Foreshadow Things to Come.”)

Since trading at a high on May 22, the benchmark Nikkei index has faltered 10.7% and has breached its 50-day moving average, as shown in the chart below, based on my technical analysis.

How the Stock Market Staged a Rally and Not a Meltdown This May image Tokyo Nikkei Average ChartTokyo Nikkei Average Chart

Chart courtesy of www.StockCharts.com

What concerns me in Japan is the lack of solid buying following the 7.3% correction on May 23. Of course, Japan’s situation is vastly different from the U.S., since Japanese stocks were up 70% in just six months.

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