New Bull Market High Due S&P 500 and Russell 2000

George Brooks  |

Brooksie’s Daily Stock Market blog: An edge before the market opens.

Monday, April 25, 2011  6:58 am EDT

DJIA: 12,505.99
S&P 500: 1337.38
Nasdaq Comp.: 2820.16
Russell 2000: 845.64

One of the most consistent seasonal patterns established over the years is the “Best Six Months” for investing in common stocks. Simply stated, buying on November 1 and selling prior to May 1 has rewarded investors handsomely with gains over the last 60 years, when compared with the six months between May 1 and November 1. Since 1950, the Best Six Months for the DJIA has averaged a plus 7.4% vs a gain of 0.4% for the “worst” six months.

No seasonal pattern is infallible, and adjustments must be taken into consideration for the onset and end of bear and bull markets.

So far the DJIA is up 12.5% since Nov. 1, 2010 with April 29 just five trading days away.

But, the best six months surge this time around really started in late August at DJIA 19,947 two months ahead of schedule in response to the Fed’s QE2, for a gain of 26.0%.

Does this increase the odds of a poor showing between May 1 and Nov. 1 this year ?

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Tough act to follow, but odds favor a bumpy road. Money can be made, but timing will have to be spot-on. This bull market has not been intimidated by negatives, institutions have tons of cash to invest, corporate earnings are still on a roll and there is a chance that the two political parties will hash out a responsible deficit reduction plan in coming months. Then too, this is a pre-presidential election year, traditionally the best of the four with no losers in 72 years.

However, with costs of doing business rising for corporations and prior quarters getting tougher to “beat,” corporate earnings may not “surprise” as often going forward depriving the market of juice from that source.

Unable to sit on the sidelines and watch others make money, it looks like the individual investor is returning to the market. According to the Investment Company Institute, $18.6 billion was invested in balanced mutual funds that buy both stocks and bonds in the quarter ending March 31.

In the week ending April 6 alone, balanced funds took in $1.24 billion, equity funds $2.4 billion and bond funds 5.22 billion. It is the latter that concerns me, since interest rates can only go down from here, raising the risk of s drop in the value bond funds. Worse yet, investors have accumulated an astounding $604 billion in bond funds since March 2009. With interest rates at historic lows (bond prices at historic highs), these investors are vulnerable to a rise in interest rates.

George Brooks

*Stock Trader’s Almanac

NOTE: I have been called for jury duty, starting Monday. This should not affect my blog, except for its “cut-off” time in the morning. I will have to release it earlier than usual, not gaining the benefit of pre-market news and the trend of stock-index futures before the open.

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