NEW YORK — With decent monthly gains in stocks countering traditional expectations for May, when, as the saying goes, investors tend to sell and go away, a tired market now might be positioned to give back some gains, some analysts believe.
“I’m having a good year so far, but I don’t want to give it back,” said Paul Mendelsohn, chief investment strategist at Windham Financial Services. “In June, we normally see less volumes, and the market is basing a lot of hopes on an economic recovery.”
The broad market, as defined by the S&P 500 index, gained 5.3 percent in May. The Dow Jones industrial average is up 4 percent for the month, while the Nasdaq Composite gained 3.3 percent.
“I’m showing the market extremely overbought,” Mendelsohn added.
After a late rally Friday, the Dow industrials gained 96.53 points, or 1.1 percent, to end at 8,500.33, the S&P 500 rose 12.31 points, or 1.4 percent, to 919.14, while the Nasdaq Composite gained 22.54 points, or 1.3 percent, to 1,774.33.
The broad S&P 500 has rallied more than 36 percent since hitting lows in early March.
“Granted, at the beginning of new bull markets, investors are driven more by faith than fundamentals,” wrote Sam Stovall, senior investment strategist at Standard & Poor’s, in a note. “But a skeptic might now say that as a result of this recent strength, we are due for a swoon in June.”
Since 1990, the S&P 500 has posted an average 0.4 percent drop in June, joining February, August and September as months posting average declines over the past 19 years, he noted.
Besides slower summer months, which tend to leave the market without a clear direction, a rising concern at the end of May has been a drop in the dollar. There are associated concerns that key commercial interest rates, such as mortgage rates, are on the rise and risk derailing an economic recovery.
According to Mendelsohn, the market has mistakenly read a recent rally in commodities as signs that the economy is on the mend. “I think it’s just a sign that the dollar is about to dive,” he said.
A weaker U.S. currency tends to lift dollar-denominated commodities, such as crude oil and gold, as it makes them cheaper for holders of other currencies.
Concerns that the Federal Reserve is printing too much money have pressured the dollar and are also raising concerns among major holders of U.S.-dollar denominated debt, such as China, according to Mendelsohn.
Bond market gyrations have already led the stock market to sell off on Wednesday, perhaps another sign of things to come in June and this summer, the strategist said.
