The Memorial Day Effect

History has shown that the markets tend to suffer during the summer months, something I made note of in "Sell in May, Go Away" but one small blip seems to occur right around Memorial Day.

A 6-day span comprising the Thursday before Memorial Day to the end of the Friday after Memorial Day has returned an average of 1.3 per cent, a significant amount considering the summer months rarely return 1 per cent.

Since the start of Thursday, the Dow Jones Industrial Average has gained over 250 points, or 2.5 per cent, with two days to go. Strong fundamentals in the American economy took over trading Wednesday, pushing the markets up 2 per cent, giving this seasonality trend a chance to fulfill. Concerns in Europe continue to linger in the market, but with all the bad news out of the way, traders are starting to focus on the economy in the United States and Canada.

Today, US May auto sales showed double-digit growth and US pending home sales grew at a larger-than-expected pace in April, fueled by tax credits. According to an Associated Press article featured on Yahoo! Finance, values of home equity seems to have bottomed, and used car prices are increasing, persuading car buyers to buy new. Friday could prove to be the decisive trading day with monthly job reports to be released.

The technicals also show significant support at the 1,075 level on the S&P 500. The market's reluctance to fall below this level has been supported by big surges in the following trading day; today was the third time this has happened. A second signal that the bear market is over: higher lows have formed since the market dropped almost 10 per cent from a "computer glitch." The sudden rise at 2:30 PM today also broke a short-term down trend that formed in the last week. And the forth reason there may be a short-term rally: the MACD patterns on the NASDAQ have gone positive, and the S&P 500 and Dow Jones are approaching this as well.

The final hour proved to be another profitable and predictable day for me, something I mentioned in "Trading the Final Hour", as bullish momentum continued throughout Wednesday.

With all this said, there are still dangers in this market. Fundamentals continue to shine, but there are still pockets of negativity emanating from Europe that have been the focal point of traders. I had been bearish in May, but I believe this rally today will lead into a better June.