This Rally Still Has Plenty of Room to Run

Watch for the Summer Slump

Seasonality turns against stock investors in May and sinks until it hits a bottom in September. February is, on average since 1950, a down month for the S&P 500, according to the Stock Trader's Almanac. But March and April have produced a 1% and 1.3% average return, respectively, since 1950. May's average return is just 0.2%.

Many of the worries in my list above are likely to have more effect in the second half of 2007 than over the next few months:

• Oil prices typically don't climb much in the shoulder season, when refineries make the transition from winter to summer products.
• The Fed is likely to keep interest rates on hold for the first half of 2007, pushing off any surprise rate increase to the last part of the year.
• And there's a good chance that investors are too optimistic about the speed of a housing-sector recovery. We're likely to see data weak enough to raise the fear that we haven't seen a bottom yet before we see the true recovery.

Cautious but not pessimistic, mind you. I don't think the stock market is in any danger of the kind of collapse that gives investors nightmares. However, I don't put a 10% correction in that category. A correction of that magnitude, as painful as it is, would actually be healthy for stocks at this point, serving as the kind of dip that brings fresh money in from the sidelines.

Swimming in Cash

Why not worry about a market collapse? Liquidity. The world is awash in cash. The flood shows no signs of receding. And it looks like more of that flow is headed toward equities over the next year.