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The Best Six Months for Stocks is Over, So Now What?

For the second time in two months, the S&P 500 managed to close out on the last day at a new record high. While even the most bullish of bulls are probably wondering when the eventual

For the second time in two months, the S&P 500 managed to close out on the last day at a new record high. While even the most bullish of bulls are probably wondering when the eventual digestion of these gains will take place, the momentum right now is still suggesting there is room to move higher.

In this week’s interview with Toni Turner of TrendStar Trading Group, we discuss whether the “Sell in May and Go Away” adage applies to the current market, and whether stocks will retest the 1600 level on the S&P 500.

EQ: The S&P 500 closed at a record high on the last day of April, which is the second consecutive month it’s done that. May, however, does traditionally kick off the worst performing six months for stocks. Does this concern you?

Turner: If we look back at 2010 and 2011, we can see that the S&P 500 made yearly highs right on schedule at the end of April, then it backed off in May. While I don’t so much trade or invest around these seasonal kinds of concepts, I still think we have to keep them at our elbow and recognize that there may be something to them. Besides that, we’ve had six months of rising momentum, and as of this Tuesday, the S&P 500 closed at its highs and is up 11 percent on the year.

I did take some profits off the table Monday and Tuesday, though not as much for the “Sell in May” thesis, but for the reason that my chart were showing me a negative divergence on the RSI for the S&P 500 and just the fact that the indices looked to be overbought and overstretched. It turned out to be a prudent move based on what happened Wednesday. Now, we’ll see what happens.

EQ: Once again, the S&P 500 pulled back a bit after hitting what could be the 1600 ceiling. Do you see a lot of resistance at that level? What are you watching for from the index to see where it goes next?

Turner: Obviously, there is resistance at 1600 and it’s quite possible the S&P 500 could pull back to its 50-day moving average, which is at 1554 right now, and then bounce off of it. However, if it goes below that line and then below 1540, I think we do need to be concerned, at least for the short term.

As I said, the markets moved up at a steep angle for nearly six months, and it doesn’t seem like any amount of ugly economic news has the power to take it down. That’s good, and we should profit from it. Conversely, we know Europe is still in a recession and unemployment is climbing over there. China has just issued lower PMI numbers, and copper and energy prices are dropping. The question is, how much higher can the U.S. market go on economic data that isn’t strong? I think that will be reflected in the S&P 500, in the next week or so.

EQ: What sector or industry groups do you have your eyes on right now?

Turner: I’m looking for pullback opportunities here and I’m back to my favorite since summer is coming. The PowerShares Water Resources (PHO), has pulled back at the moment and I’m watching it hold $21.20, and if it can hold there and bounce, I may get active in that again.

I’m also watching the REITs and the iShares Dow Jones US Real Estate (IYR) if the Fed keeps interest rates low.

Another ETF I’m watching is the PowerShares DB Agriculture (DBA), which trades an index of agriculture commodities. I’m watching it right now to see if it is bottoming here. Of course, I will have to wait to see if it pulls back further. If it stays above $25.50, then I’ll probably keep my long position in it.

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