As April is upon us and May just around the corner, I tend to keep my ears open and watch the markets to see if we are going to have a repeat of the last three years when a pullback occurred during this season. There are numerous signs that point to a slowdown coming, but there are also others that hint it may not come "tomorrow." Let's take a look at some of these signs just to be aware of what's happening.
With the markets doing so well, one thing we don't want to see are investors becoming lax. There are certain things occurring in the market that are important for all investors to be aware of. Usually, when no one is looking for it, risk tends to lift its head. The markets have been in a four-year rally and when optimism becomes as abundant as it is now some people start to get skittish. Could this year be the beginning of a long-term decline for the markets?
Being Studious in April
As April approaches the market has given us some great gains since the beginning of the year and for the fourth consecutive year. The past three Aprils have also been the starting point for corrections in the market. For the last three years consumer confidence has grown, peaking and then pulling back sharply. Volatility is still at cellar levels which shows a lot of complacency in the market. As April comes around, investors should keep aware of the last three years.
Some strategists are expecting a pullback of 2% to 5% before the markets continue to move up to new highs by year's end. As the S&P 500 (SPX) flirts with new highs it has been hard pressed to push through. In March, the market has been within 1% but couldn't top out. New highs are often an emotional point for many investors who look at taking profits which can trigger a pullback. These are things to consider as investors.
There are other things which can accurately signal a coming slowing of the market. One of the most important factors to consider is the slow down in hiring. Even though we are still a growing economy, March only added 154,000 jobs when 197,000 were expected and this is a far cry from the 237,000 added in February. Does this mean we are going to turn bearish? No, we are still growing, just not as fast and it should make investors think. Over confidence in a market like this is something to be sober about.
In my observations, I would expect we could see a breakthrough to a new high and then a possible pullback-close to 3% before the stock turns back up pushing through the new highs again. One point of interest that can invite a correction is the isolation of the US economy's growth this year. Since the beginning of the year the US markets have grown 10% while the rest of the world has not seen this happen. Brazil is down 8%, China is down 1%, and other emerging markets fall somewhere in between. These are headwinds that make it easier for a correction to come sooner than later. There are quite a few signs that can make a positive argument for a soon to come correction. It makes sense with the cycle of the season upon us.
Not Yet Bears!
Another speculation for a weakening market is the lower volume which typically means that the strength of the trend is just not there. Volume for March is about 12% lower than it was a year ago. But if we're going to look at volume it is much more reliable to look at a buying to selling volume ratio. The buying to selling ratio is much higher now than it was in March 2011 which supports a strong bullish trajectory at the present. This is supported by a very strong market breath whereby the numbers of advancing stocks are far ahead of the number of declining stocks.
If certain signs as well as the season are hinting that the present bullish trend may slow down, momentum has not been told about this. Presently the market still looks strong. I would trade with a cautious attitude. I don't believe the S&P 500 ETF, the SPY,will turn bearish in the next week or so. Bullish momentum will keep it moving before it slows down.