Bulls Take Control
The market extended its recovery off the February lows with an impressive advance in April. In fact, in the last two months the market has recouped all and then some of the steep late-February decline that jittered the market but is now nothing more than a distant memory.
The major indices, led by the large-caps, took out recent highs from February and embarked on a new up-leg within the market's longer-term uptrend off the 2003 bottom.
The DJI 30 and S&P 500 posted the biggest monthly percentage gains in more than three years. Over the past 12 months, these two indices have sported healthy double-digit percentage gains (14.9% for the Dow and 13.1% for the S&P 500).
The upper end of the market cap spectrum domi-nated in April, evidenced by the inverse relationship between cap and performance; the Russell 1000 gained 4.1% compared to a 1.4% advance for the Russell Microcap Index.
Growth outpaced value by at least 110 basis points across all four market caps in April, reversing a trend that had seen value lead the way for the prior two months following February's decline. This flight from quality indicates an acceptance of greater risk and possible complacency, which often leads to short-term corrective action. As such, stocks are now a bit extended and vulnerable to selling pressure.
Also, keep in mind that seasonally we are now headed into the historically weakest six-month period of the year for the stock market (May-October). That means we may see some consolidation in the coming months
Nevertheless, the major indices continue to chart higher highs and higher lows (the classic definition of an uptrend). Thus, the strong rally in the mid-cap and large-cap segments, which now boast the best percentage gains for the last 3, 6 and 12 months, should not be ignored. Until we see evidence of an intermediate-term reversal (and not just emotionally-triggered panic selling), the long-term trend remains bullish.
The market continues to favor GARP-like companies with strong, stable cash flow growth and superior EPS momentum.
Next update: Second week in June.
