‘Sell in May’?

Are we looking at a potential correction in stock markets? Recent market summary in bullet points:

  • Two-day decline in key US equity indices this week, the first such decline since March
  • This consolidation happened despite the accommodative Fed, a policy reaffirmed in this week’s FOMC meeting
  • Many equity indices are far above their long-term moving averages (e.g., 150-day) and overbought
  • Big tech IPOs – Lyft, Zoom – many have soaked up available demand. Uber’s is another upcoming IPO
  • Many stocks are ‘priced for perfection’ – a slight miss may cause prices to crash (e.g., Google)

How much room for growth is there left in US stock markets? Is the projection currently too bullish?

Based on the above developments, I suspect yes. Well, at least for some stocks that have recovered and advanced significantly from their December lows. A stock that has rallied 50% to 100% in five months contains significantly more risk. Momentum is a two-edged sword.

I have, in recent posts, suggested some defensive positioning to guard against a pullback. Indeed, the VIX Index is on the rebound. More upside above the long-term trend indicator?

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