In May, stocks showed strong positive momentum, reaching new all-time highs just above 5,300 for the S&P 500 (SPY) after a weak April. Despite some economic reports indicating high inflationary pressures, investors remain bullish on stock prices, leading to a consolidation around 5,300.
During consolidation periods, stocks trade within a narrow range around a target, with movements slightly above and below. While this may appear calm on the surface, there is often significant turnover and volatility underneath, leading to heavy sector rotation where some groups see gains while others experience losses.
This period of consolidation and sector rotation can also be referred to as a rolling correction, where different sectors take turns experiencing profit-taking without significantly impacting the overall market level. This is a normal part of investing in a bull market, allowing for pullbacks, corrections, and sector rotations to occur to prevent complacency among investors.
Investors are now awaiting economic reports to provide signals on inflation and the potential timing of the first Fed rate cut. Reports such as PCE, ISM Manufacturing, ISM Services, and the Government Employment Situation will offer insights into these factors. It is essential to monitor these reports as they can impact stock market performance.
While the short-term risk may lean towards the downside, it is crucial to stay fully invested in a bull market, as it can advance at any time. The key is to have a well-balanced mix of stocks and ETFs to maximize profits in this market environment.
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Overall, staying informed and diversifying your investment portfolio are essential strategies for success in the ever-changing stock market landscape.