Is This Rally Sustainable?

May. 5.09 | About: SPDR S&P (SPY)

Isn't that the million dollar question? I mean the market has raced up some 35% since the beginning of March and the S&P is now positive for the year, after having hit 12 year lows less than 50 trading days ago. Here are just a few things to consider:

  • This rally could be nothing but shorts covering.
  • S&P index, represented by SPY, while above its 50 DMA is still below is 200 DMA. Failure of the 50 DMA to overcome the 200 DMA might bring out the technical bears again.
  • Summer, and specifically May, marks the beginning of a 2-3 month lull period during which the markets have historically given back some gains.

On the other hand:

  • This rally could be the real thing. After all, we know the markets were oversold and didn't deserve to be cut over 60%.
  • While the market has moved up strongly, many investors who had moved to safer havens like bonds or CDs are still on the sidelines watching in horror as they miss out on this brilliant move. If this is true, once they start piling in, the market could be propelled much higher.

Then again, all of the above could be true. I just don't know whether the bullish or the bearish case wins out. At any rate, proceed with caution. If you have profits that are unrealized, sell some stocks. If you are not in this market, start buying some ETF's on down days.