Three up days in a row and a new record for the S&P 500 have made it clear that stocks have broken out of their three-week malaise.
After alternating between down and up closings for an unprecedented 14 straight days, the S&P has now risen every day this week. Can stocks keep the momentum going?
There are plenty of reasons for and against that happening. Here are a few of them:
Why the Rally Will Continue
- Nothing has managed to slow this market in 2013. Since the fiscal cliff was averted on New Year’s Eve, stocks have been on a tear. The S&P 500 has advanced 8.6% year-to-date, shattering record highs in the process. Analysts have been calling for a pullback for three months. They’ve been wrong every time. What’s to stop it now?
- This could be a record earnings season. Alcoa (NYSE: AA), the bellwether of earnings season, got things off to a nice start with its Q1 earnings beat on Monday. It could be just the start of a huge quarter. Companies listed in the S&P are expected to generate between $25 and $45 per share in profits, which at the high end would put this on pace to be the most profitable earnings season yet.
- April is traditionally the best month for stocks. Before the “Sell in May, Go Away” theory comes into play, investors typically go on one last early-spring spending spree. Since 1950, April has been the best month for the Dow Jones Industrial Average and second-best S&P 500 month. Stocks have risen for seven straight Aprils, by an average of 3.6%.
Why a Pullback is Coming
- Too many headwinds. Wall Street hasn’t paid much attention to them of late. But there are plenty of economic headwinds still out there. Cyprus, the weak jobs report, sequestration cuts taking effect – none of them have scared investors off yet. But with stocks at record highs, they may soon.
- The “fear gauge” is rising. Since dipping to a five-year low on March 15, the Volatility Index – a.k.a the VIX – has risen more than 9%. That’s still not nearly at the levels we saw leading up to the fiscal cliff deadline in late December or even as the sequestration deadline approached in late February. Nevertheless, investor fear is back on the rise.
- A correction is inevitable. No one seems to know when the market will pull back. But short-term corrections are inevitable. Stocks simply don’t continue to rise in perpetuity without hitting a few speed bumps. Eventually – whether it’s this week or next month – it will happen again.