Wall Street Week Ahead: Correction Talk Gets Old As Rally Sails Along

With the broad S&P 500 Index .SPX gliding once again into uncharted territory and posting four straight weeks of gains, the talk of Wall Street’s rally inevitably hitting a ceiling is starting to get old.

Concerns about a technical correction have been a hot topic for weeks, especially as the rally accelerated in May – the S&P 500 is up 4.4 percent so far this month and up nearly 17 percent for the year. But as the three major U.S. stock indexes inch higher and higher to set record after record, many analysts are shrugging off the pullback worries.

“There isn’t a technical level that we have in mind at this point when making decisions. The momentum is really strong, and riding along that momentum is what we should have in mind at this point,” said Cam Albright, director of asset allocation at Wilmington Trust Investment Advisors in Wilmington, Delaware.

The S&P 500, which rose above the 1,600 level only about two weeks ago, is now less than 40 points away from 1,700.

As the market continues its upward move, some market participants are beginning to believe that the rally is not a bubble but rather the start of a new bull market. Others argue, meanwhile, that the strong momentum is not based on fundamentals like economic data or corporate earnings but is relying heavily on easy monetary policy from global central banks.

Regardless, the consensus in the short term is that the market will avoid two of Wall Street’s most popular maxims – “sell in May and go away” and “summer doldrums” – and maintain the upward momentum.

With earnings season coming to a close, next week’s focus will be on the U.S. Federal Reserve. Chairman Ben Bernanke will head up to Capitol Hill on Wednesday morning to testify on the economy before the Joint Economic Committee. The minutes from the Federal Open Market Committee’s most recent policymaking meeting on April 30-May 1 will be released on Wednesday afternoon.

Preparations for the Memorial Day holiday on May 27 will probably cut trading short, and most market action is likely to be completed by mid-week. Lighter trading volume may also trigger slightly higher market volatility.

FEAR NO MORE

Along with the S&P 500, the Dow Jones industrial average .DJI has been setting a string of record highs. The Dow has gained 17.2 percent for the year. The Nasdaq Composite Index .IXIC is up 15.9 percent for 2013 so far. On Friday, the Nasdaq closed at its highest level since October 2000.

Even at these levels, a popular options gauge shows investors are placing optimistic wagers on the stock market, positioning for the current run-up to extend for the next three months.

Earlier this week, the Credit Suisse Fear Barometer, known as the CSFB Index, fell 11.4 points over the past two weeks – the largest decline on record – and is now at a one-year low of 21.73.

The indicator essentially tracks investors’ willingness to pay for downside protection with zero-premium collar trades that expire in three months, using S&P 500 index .SPX options.

“It’s unusual to see at these levels that there are very few indications (based on options activity) that investors are expecting a pullback,” said Randy Frederick, managing director of active trading and derivatives at Charles Schwab in Austin, Texas.

The CBOE Volatility Index, or VIX .VIX, Wall Street’s fear gauge, is down more than 1 percent for the week.

The options market is a popular place for investors to hedge against a sudden fall in the stock market. Among the most popular strategies are put options on the S&P 500 index, and call options on the VIX, which generally moves inversely to the S&P 500.

“Even if we see 1 (percent) to 2 percent decline, that will be just another opportunity for people to get into the market,” Frederick said.

Next week’s economic indicators include existing home sales for April on Wednesday, followed by weekly jobless claims and new home sales for April on Thursday, and durable goods orders for April on Friday.

In earnings, a number of retailers’ results are expected next week, including Home Depot (HD.N), Best Buy Co (BBY.N) and Lowe’s Companies (LOW.N).

Reuters