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Published On: Sun, May 19th, 2013

The Advance: 20th – 24th May 2013

The word on everyone’s lips over the last fortnight and beyond has been “correction”. Analysts and self directed investors alike have all been trying to decide when the recent rallies in America will come to a grinding halt. As the impressive gains head into its fifth consecutive week, we take a look at what could potentially derail the rise of the S&P 500, or perhaps even add to its momentum.

Investors who have been trading the markets for some time will have seen this all before. Talk of rallies “hitting a ceiling” become prominent and appear to be the only real threat to the growth being enjoyed by others who choose to keep their eye on the prize and let the momentum carry them forward.

The S&P 500 has seen gains of almost 17 percent since the turn of the year, with 4.4 percent of that rise taking place so far in May. There are a number of possible reasons for this sudden growth, many of which make perfect sense. The relaxed monetary policy from central banks across the globe has encouraged investors to move their money away from currency and into the stock markets, which causes a sudden but dramatic rise. While that is perhaps the most popular theory at the moment, others believe that we are now seeing a shift in the market towards bulls, which could remain for some time. The more optimistic traders will of course be talking about global economic growth and economic recovery. The fact of the matter is, for now, markets are flourishing and there is money to be made.

The CSFB, an index which essentially tracks investor confidence, also declined by more than 11 percent this week, representing it’s largest decline in history. This will undoubtedly reassure investors that they are not alone in their aggressive trading and, in theory, spur on further growth.

While we think that long term this trend will continue, next week does have a few traps for us. Monday the 27th is obviously Memorial Day, which is likely to lead to less trade volume during the backend of the week, potentially causing a little more volatility than we are used to seeing of late. With that in mind, it seems only natural that the majority of business will be done during the earlier parts of the week, once the market settles down from any and all events that take place this weekend.

Wednesday will see Federal Reserve chairman Ben Bernanke, who we recently placed 4th in our list of 10 most influential people in finance, give his views on the economy in front of the Joint Economic Committee. His words, whatever they may be, will undoubtedly have an effect on the markets — although after the data released last week and the markets reaction to them, few investors will be worried. Later in the day the minutes from the Federal Open Market Committee’s meeting on April 30th to May 1st will be released. The meeting focused exclusively on policy and the next steps that policymakers should take.

With the rally now having so much momentum, it will take something drastic to knock it off course. If a negative comment or piece of data is released which would ordinarily cause a small dip, investors are likely to use that as an entry point for their trade. Nothing is certain in finance and there are a few hurdles to overcome next week but the outlook is generally a positive one.

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About the Author

- Gregory previously worked for a leading financial news publication and is now assistant news editor of financialtrading.com.

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