Investors who adhered to the old adage “Sell in May and go away,” would have been very disappointed last month. The S&P 500 Index and the Dow Jones Transports both achieved new records and the Dow Jones Industrials was nearing a new high. Even the Nasdaq showed a significant recovery. June begins on much stronger footing than May, thanks to those new highs. Now attention will be focused on the small cap space, one of the remaining outliers, to see if those stocks can rebound.
For the month, the Russell 2000 gained only 0.68 percent but it did provide an indication that its underperformance may be coming to an end. The Nasdaq rebounded 3.11 for the month, whereby moving the index back into positive territory for the year. We have continued to favor stable, large-cap holdings for some time; this strategy has paid off as the S&P 500 continues to lead, up 2.10 percent for the month and 4.07 percent year-to-date.
At this point in time, investors should being paying close attention to the transportation sector. A continued upward move in the transportation index is perhaps the most bullish sign for the markets. These companies directly benefit from increased economic activity and are involved in moving basic goods such as energy. Railfax, which tracks rail carloading data, shows that activity has surged in 2014. Each year there is a cyclical dip in activity during the winter months, then an increase that runs into the autumn. This year, activity has already reached levels last seen in November 2013.
Economic data out over the weekend was mixed. China’s official manufacturing PMI increased, but exports from South Korea to China slowed, even though exports to the E.U. and U.S. grew. It appears the developed markets are pulling the emerging markets along, not the other way around. Emerging markets may see an uptick if commodity prices rise. Specifically, oil prices could soon be at new highs for the year, and that would be good news for Brazil along with domestic energy stocks.
Earnings: A week of few earnings reports. Home builder Hovnavian (HOV) and networking equipment maker Ciena (CIEN) are among the bigger name reporting. Also, Krispy Kreme (KKD) , Smith & Wesson (SWHC), Joy Global (JOY) and Dollar General (DG).