Choppy, sideways trading likely ahead this summer

How is the stock market set up heading into summer?

It’s hard to make a confident case the summer of 2018 will either be “hot fun” or particularly cruel.

The weight of the evidence tilts toward some more aimless knocking around, punctuated by a few bursts of excitement, and probably a couple of attempts by the bears to raid investors’ picnic.

Memorial Day weekend marked four months since the major indexes peaked in a crescendo of heedless optimism and maximum momentum, and the past two have seen them settle into a tight band.

Call it rediscovered stability or stalemate or indecision, but whatever the characterization, the S&P 500 has been well-anchored near the middle of its 2018 range. At Friday’s close of 2721, the index was up 5.4 percent from its Feb. 8 closing low, and it would take a 5.5 percent gain from here to match the Jan. 26 all-time high.

The tape showed impressive resilience in April, refusing to buckle despite several trips toward the lower end of the 2018 range. But the thrust behind rallies has been unimpressive and the strength has been selective and shifting within the market.

The forces holding the market in this zone are well-known to the point of being taken for granted now: supported by fast-rising corporate profits, solid consumer trends and favorable credit conditions, while hampered by somewhat higher bond yields, suspense about rising inflation and persistent questions about how much profitable life is left in this cycle.

It’s tough to see how any of these factors resolve themselves decisively in one direction or the other in the next couple of months. The long-term trend still favors the bulls and will continue to so long as the S&P holds within a few percent of the current level. Yet on a tactical basis in the short term, the aggressive equity optimists have a bit more to prove. Recent rallies have failed to surmount the threshold on the S&P 500 — around the 2750 mark — from which stocks fell hard two months ago on a swirl of China trade salvos, Facebook privacy scandal and the latest Federal Reserve rate hike.

The valuation of stocks relative to bond yields — to cite one big-picture relationship — has been steady at levels that seem neutral based on the past decade or so.

The 10-year Treasury hit 2.94 percent in a rush higher on Feb. 21; the yield finished Friday at 2.93 percent on a pullback. On both dates, the S&P sat a bit above 2700. There’s nothing necessarily rigid about that relationship over time, but these asset classes seem engaged in a sort of uneasy equilibrium for the moment.

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