A Big Month-End Rally Day

Stocks have been pushing consistently higher all day, a change in character from what we have been seeing this year. It is further confirmation of the medium-term positives we've been discussing in the Daily Report.

A big gain to end the month has often led to follow-through during the first few days of the next month, especially the first day. The beginning of a new month has a bullish tint to it anyway, but especially so when the previous month ended with a daily gain of 1.5% or more (Figure 1).

One caveat about this is that the S&P set a 52-week low during the month. When it did so, the results got noticeably less positive (Figure 2). Returns over the next month were especially negative.

There are some strong cross-currents here, with the negative price trend and dangerous readings in some long-term indicators (equity vs cash assets, etc), but extreme pessimism and many signs of capitulation last week.

The bottom line with cross-currents like this and the tables above, is that two-sided volatility should be expected. We still expect an upward skew in prices in the coming week(s) but don't see compelling enough reasons to be aggressive.