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Market Insider: Friday Look Ahead

Will May trip up Wall Street's bull?

Many traders think it might, at least temporarily. But then again, April defied all predictions that stocks would pull back, as investors continued to buy into every dip.

Thursday's market action though showed signs of fatigue as the Dow scored triple digit gains that fizzled as the news Chrysler would be rolled into bankruptcy was made official.

The Dow ended the session down 17 at 8168, and the S&P 500 was down 0.83 at 872.81.

The S&P 500 rose 9.4 percent in April, its best monthly performance since November, 2001, and the Dow was up 7.4 percent. The Nasdaq rose 12.4 percent, and the Russell 2000 climbed 15.3 percent for the month.

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The best performing S&P sector was also the most controversial - the financials, which gained 22 percent against a backdrop of anxiety that the government's stress tests will show some institutions need more capital. The worst S&P sector in April was health care, down 0.89 percent, the only negative group.

Todd Leone of Cowen says stocks Thursday encountered resistance at 885 on the S&Ps. "I just think we've had a tremendous move up. They could just not hold them. They ran into a little resistance. I don't think anybody wants to be long going into the weekend. Monday's traditionally this year have been terrible," said Leone.

"Everything's getting a little over extended because we've had a big move up. We're backing and filling, and I think that's the best thing that could happen," he said.

Autos may continue to help drive the stock market Friday, as April car sales are released by the industry throughout the day. ISM manufacturing for April is reported at 10 a.m., as are factory orders. Consumer sentiment is released at 9:55 a.m.

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Chevron, Clorox, Aon, Fortune Brands, MasterCard and Allergen report earnings. Treasury Secretary Tim Geithner participates in a U.S.-China conference Friday morning, and St. Louis Fed President James Bullard speaks to the Arkansas Bankers Association at 9:45 a.m.

Sell in May?

Birinyi Associates, for one, says the old adage "sell in May and go away" is only right about half the time. Every year, traders roll out the saying just as May day approaches, and this year they worry it may ring true because of the market's strong run.

Birinyi on Thursday issued a note showing that from 1962 to 2008, in the period between May 1 and the end of August, the S&P was down 51 percent of the time. The average change for that period though is a gain of 0.49 percent.

In the note, Birinyi's Cleve Rueckert says there was a significant difference between bull and bear market years. In the bull cycle years, stocks were up 60 percent of the time with an average gain of 3.15 percent, but in bear cycles, the market was down 83 percent of the time and the decline averaged 7.27 percent.

Green Shoots

Since Fed Chairman Ben Bernanke suggested he was seeing green shoots, investors have been looking everywhere for them, and many in the stock market believe they see a whole garden full.

Jim Paulsen, chief investment strategist at Wells Capital Management, found a new shoot Thursday in the weekly unemployment claims. He said a peak in these numbers has been a good indicator for recession ends since World War II. He said Thursday's release of weekly claims shows the data has now been trending sideways since the end of January.

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"The four-week moving average has rolled over -- declining in each of the last three weeks," Paulsen says. He said the behavior of several internal measures he's been watching in the stock, commodities and bond markets also may indicate a bottoming in the economy, and parallel the peak in unemployment claims.

"I just think that the internal dynamics of every one of the markets is also validating the economy is bottoming," he said. For instance in the stock market, he looked at cyclicals versus stable stocks, and the cyclicals have been outperforming by a wide margin.

He also looked at gold prices relative to industrial metals prices. "The reason that ratio corresponds so well to unemployment claims is that when claims spike upward, people rush to precious metals and they dump commodities," he said. In the bond market, he looked at junk spreads which have been tightening.

"It's another green shoot indicator," he said. "All those things tell a similar message. Sometimes they're not in sink, but right now they're all saying the same thing. That's why I think it gives you a little bit of confidence in this."

Treasurys

The dollar gained fractionally against the euro Thursday and is up 0.4 percent for the month. The 10-year finished April with a yield of 3.124 percent, its highest yield since November 24.

Rick Klingman, managing director of Treasury trading at BNP Paribas, said the Treasury market traded better in the afternoon, as equities lost gains. "We also had month end buying that pushed us up into the close," he said.

Klingman said the Fed's purchases Thursday were disappointing. The Fed bought $3.025 billion in Treasurys, maturing between 2019 and 2023.

"People were wondering if the Fed was going to make a statement today and do a large buy back, showing they were going to keep rates low. But the buy back was nothing out of the ordinary," he said.


Questions? Comments? marketinsider@cnbc.com

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  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

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