“I strongly believe that what we are experiencing is a normal bull market downturn and that we will soon see the market return to its recent highs.”  I wrote those words in the March 8 MarketOwl commentary. My earlier assessment proved to be correct and now we have seen the Dow reach an all-time high and other major indices climb to multi-year highs.

If you’ll look at the chart below, you can notice several things. First you’ll see that when I wrote those comments on March 8 the indices were near their lowest point during that recent correction. As usual when the market dips, there were plenty of folks predicting that the markets were on the brink of a major decline. Next you’ll see that the Nasdaq (black line), Dow (gold line) and the S%P 500 (blue line) have all recovered and exceeded their February highs. Over the past year all of these indices have made nice gains. One thing that has been a little unusual is that the Nasdaq has trailed the other two major indices. Normally the Nasdaq leads bull market advances.

For today, about all that’s left to write is to give an opinion about what is likely to occur next. Watch for the markets to continue to advance during May, but probably at a much slower pace. At that point expect to see the markets move sideways or drift downward for most of the summer.

On the early portion of the chart you can see that a year ago, the Nasdaq corrected steeply during the summer and the other two indexes also declined. There is always downward pressure on stock prices during the summer. Traders and investors don’t want to hold exposed long positions when they are on vacation, so more selling than usual takes place. In addition, trading volume tends to be lower because of people on vacation. So it is fairly common to see indices drift lower.

One of the reasons for the recent acceleration of stock prices is that first-quarter corporate earnings were stronger than expected–in many cases much stronger. Combined with overall strength in the economy, it seems unlikely that we will se any kind of a sharp drop in the indices in coming weeks.

Have a great weekend.
F.S.

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