The Best Stock Gains—When to Come Back for Them

What the best six months of the year for stocks are and what we can expect from the market over the summer months.The key first-quarter earnings are coming to an end, and it has proved to be a decent quarter. With 445 S&P 500 companies having already reported as of May 9, 69% have exceeded expectations, while 20% of the companies were on the short side. The blended growth rate for the first quarter has been impressive at 18.5%, up from 12.2% on January 3, 2010. Again, these are decent results; but, keep in mind that 31% of the companies failed.

And whether it is penny stocks, micro-cap stocks, or S&P 500 companies, you have to be impressed by the sustainability of the positive sentiment. The real test now comes as stocks edge higher. We need to see a strong break higher or risk a relapse.

Did you also realize that the best part of the year for making money is over? The period from November to April is historically the best six months of the year for stocks, according to The Stock Trader’s Almanac. This period has come to an end. May started with three down days. In addition, the six months from May to October have been the subpar versus the November-April period. This is a generalization, so good stock picking will succeed.

A red flag remains, as the associated trading volume continues to be light on up days, which fails to help confirm a strong buy signal. Unless we see increased volume on the up days, I question the lack of mass market participation in the current rally.

The near-term signals have a positive bias, but watch the neutral Relative Strength and overbought condition.

The sentiment in the market remains bullish. The trend of the NYSE new-high/new-low index has been edging higher, with 197 of the last 209 sessions bullish as of May 9. In the technology area, 148 of the last 167 sessions have been bullish.

The overall market is drifting slightly lower. As of May 9, about 76.42% of all U.S. stocks were above the 200-day moving average (MA), down from 81% a month ago. For the shorter-term moving averages, the monthly decline has been more significant. For instance, about 48.77% of U.S. stocks are above their 20-day MA, down from 70.22% a month ago. There could be a pending market decline.

With the two-year bull market, investors and traders are looking for a reason to sell and take some profits in the summer months and come back in the fall.

I feel somewhat nervous going forward in the summer months and think that stocks may drift in the absence of any major catalyst. Stocks are already discounting positive economic news and, with earnings coming to an end, stocks are likely to drift.