After a greater than 9% rally in just three months, it's getting hard to find reasons to stay long stocks. That's why Breakout invited Ryan Detrick of Schaeffer's Investment Research back to make the other side of the argument.
Detrick has put forth three reasons why a pullback may not be as obvious as you think:
1) April is seasonally strong
Detrick has broken down the numbers, and April is rather surprisingly the strongest month for markets over the last five and 10 year periods. Going even deeper over the last 20 and 30 years, April is the first and second strongest month of the year on average.
"This is one stat, but seasonality wise we know 'sell in May and go away' is kind of the last hurrah. But April's strong, so don't fight it is our opinion."
2) Nearly one-third of the public is expecting a correction
Detrick says the closely watched Investor's Intelligence poll shows that greater than 30% of those surveyed are looking for a correction — a meaningfully bullish sign since 2009. "People just keep tripping on themselves to try and pick a top here, and that's not usually how tops form. Tops form on euphoria," he says.
3) Short interest is Ramping Higher
Looking at the S&P 500 since the first of February, short interest has risen more than 10%. Every time the market resumes its upward momentum the shorts have to cover, creating a self-fulfilling contrarian rally.
"That's very bullish, in our opinion," says Detrick. "We like seeing that and could very well mean that April's good, and maybe even going into the summer."
Obviously the market is fully capable of crumbling even when everyone expects it. Last year saw a 10% spring pullback, and 2011 was marked by a drop of just under 20%. Of course, in both cases stocks finished higher for the year.
Detrick says he's not naive to the concerns and the significant headwinds still facing the tape, but the odds aren't on the side of the bears. For those tempted to start shorting against the momentum, a little prudence — or at least some consideration of the other side of the trade — may be in order.
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