Why Stocks May Stage a Summer Rally

According to longstanding stock market lore, investors should "sell in May and go away," dumping equities this month in anticipation of a seasonal downtrend in prices during the summer months. This year, however, the table may set for a summer rally.

As Ari Wald, technical analyst at Oppenheimer, told CNBC: "I think the incremental positive is we broke the string of lower highs that's been in place since January. Our take is the correction that began in January is coming to an end." Indeed, contrary to the old adage, both the month of May and the period from June through August tend to see stock market gains. (See also: The Truth About 'Sell in May and Go Away.')

Rebound From Correction

Through the open on May 15, the S&P 500 Index (SPX) is up by 2.7% so far in the month of May, and by 1.7% year-to-date (YTD), per Yahoo Finance. Though this is still 5.4% below the all-time high reached on Jan. 26, the widely followed market barometer has rebounded significantly above correction territory. The last time that the S&P 500 was at least 10% below its Jan. 26 high was during intraday trading on April 4.

Regarding the Dow Jones Industrial Average (DJIA), it also has gained 2.7% in May, but has posted a slimmer 0.7% increase YTD. It's off by 6.8% from its own record high on Jan. 26, and, like the S&P 500, it last fell into 10% correction territory from that high during intraday trading on April 4.

Rallying Causes

Tech stocks led the market in 2017, and may be poised to continue in 2018. Keith Parker, chief U.S. equity strategist at UBS, made this observation to CNBC: "I think you're seeing leadership reassert. Twenty-five percent of the market cap—tech—is now doing better. The fact we've seen small-cap outperformance is reflective of a market that does seemingly want to take on some risk."

Parker also sees significant impetus for a summer rally in heavy corporate stock repurchase action. Research by UBS indicates that buyback announcements are up by 80% this year, while actual outlays on buybacks are running about 50% ahead of last year's rate so far.

Ryan Detrick, senior equity strategist at LPL Financial, sees a bullish note in the mere fact that the S&P 500 is now up YTD. He finds that, in 35 of 36 times that the S&P 500 had a positive total return for the YTD at any point in May, it also was positive for the full year. With respect to the odds that the S&P 500 will revisit its Jan. 26 record high, Detrick told CNBC: "We think it definitely could happen sometime this summer. The small caps leading is very powerful."

An apparent easing of trade tensions can offer a big fundamental boost to the market. Analysts cited by CNBC note that a new NAFTA agreement seems likely, as well as a deal with China that removes U.S. sanctions.

'Fundamentally It Looks Good'

Meanwhile, another CNBC report notes that the Dow has been above its 200-day moving average for 472 consecutive trading sessions through May 14, the longest stretch since 1984 to 1987, and the seventh-longest ever. This is positive from both a technical and a fundamental standpoint, according to Michael Bapis, who heads a wealth management practice affiliated with HighTower Advisors. As he told CNBC: "Fundamentally it looks good, and that's what's different from many of these other periods where it has been above the 200-day moving average for so long. Earnings are still strong, dividend yields are still high and the economy is really growing."

'Stay the Course'

Sam Stovall, chief U.S. equity strategist at independent research firm CFRA, said "I call myself a bull with a lower-case 'b'," in a third CNBC report. "Earnings are coming in much, much better than expected," he noted, but added, "I have to worry about it getting worse from this point forward."

However, he also indicated, "In more than 70% of observations since WWII, the S&P 500 rose in price nine months after a peak in 12-month GAAP EPS growth."

His advice: "Stay the course. This correction may not be over quite yet, but we don't see it morphing into a new bear market." 

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