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Why the second half could be good for stocks

Stock market surge

In case you haven't noticed, the stock market has been in an upswing during the first half of 2017, surprising a lot of the skeptics. As of the end of June, the S&P 500 stock index has leaped about 9 percent, which is more than twice the average gain during the first six months of any year since 1946. Nine of the S&P 500's 11 sectors participated in the parade.

"Now what?" is the question nagging investors in July. Will the good times continue to roll in the second half, or will the high-flying stock market disappoint?

History might provide the best answer: "Investors might want to prepare for good news in the second half," advised Sam Stovall, chief investment strategist at CFRA Research.

He noted that since World War II, the S&P 500-stock index has gained an average of 4 percent and 4.2 percent during the first and second halves, respectively, and posted an average 8.6 percent advance for the entire year. And what's more, the market rose in price 69 percent during all the second halves, Stovall pointed out.

The stocks that have been on the winners list were from the same sectors that are currently donating the market. From Dec. 31, 1989, through June 23, 2017, the top five high performers were technology, consumer discretionary, consumer staples, industrials and health care. 

Nonetheless, one problem that's expected to hit the market during this year's second half is volatility. Wild swings are likely to erupt during the third quarter. Since 1990, the S&P 500 declined an average 0.6 percent in price during third quarters. Five sectors of the S&P 500 that pulled back during that time period were consumer discretionary, financials, industrials, materials and telecom services.

Stovall noted that although volatility usually defines the market's third-quarter performance, "it will likely offer a reason to buy, not bail." He pointed out that should the market's performance during this year's second half follow the historical upbeat results, "the S&P 500 will close the year around the 2,565 level." 

While this forecast approximates CFRA's 12-month target based on current per-share earnings and inflation projections, "history implies that we may be underestimating the market's rest-of-the-year potential," Stovall argues.

Since the S&P 500 remains close to its all-time high, "it may be prudent to monitor those groups with improving relative performance," advised Stovall.

Of the 147 subindustries in the S&P 1500 index, 15 saw increases in their current relative-strength ranking over their strength four weeks ago. Among them are consumer finance, industrial conglomerates and biotechnology. In consumer finance, CFRA's favored stock is Ally Financial (ALLY), and General Electric (GE) is its choice stock among industrial conglomerates. Among biotech's, the favored stock is Celgene (CELG).

Noted Stovall: "These rankings historically have served as a fairly reliable indicator of forward price performance."  

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