After Wall Street defied the traditional sell-in-May-and-go-away maxim, September could be poised to ignore expectations as well.
An anticipated correction following the summer's sharp rally of about 15 percent since mid-July has some analysts thinking that September could live up to its hostile reputation. Those predictions are buoyed by the first month of fall's reputation as the market's worst, with stocks down about 1 percent historically.
But the prevailing sentiment seems to be that even if a correction does come along, it will be healthy for the markets. Now is not the time, market bulls say, to be taking money off the table.
"Sell in May didn't work very well," Gene Peroni, of Advisor Asset Management, told CNBC. "I'm not sure September is going to be the evil month that many people expect."
Among the factors working in favor of a continued market rally are developing signs that the recession is on its last legs or even over. Housing prices and sales have begun to pick up and consumer sentiment, though still shaky, has been improving.
And Monday's business cycle brought with it a fresh positive sign: Business activity in the Midwest, as measured by the Institute for Supply Management-Chicago, picked up more than analysts expected. The 50 reading on the ISM represents the dividing line between expansion and contraction and is the highest for the index since September 2008, the same month the financial system collapsed.
"People start to see housing starts increase and sales are starting to increase and inventories are getting wiped out, and all of a sudden maybe it's not so bad out there," says Nadav Baum, managing director of investments at BPU Investment Management in Pittsburgh. "Now you have the argument that this (market selloff) got ahead of itself too fast."
Baum is in the camp that a correction could come, but it won't be anything devastating—perhaps 7 or 8 percent—and will be a healthy detour on the market's way up.
As such, he's continuing to build positions in quality companies that were beaten down during the market's tumble from October 2007 to March 2009.
The five-month rally has been built largely on the backs of small-caps, commodities and companies that were badly hurt after the collapse of the credit markets—think Citigroup , Bank of America, American International Group, and other financials.
Now, Baum thinks it's time for companies to shine such as Caterpillar, Deere and Coca-Cola.
"You don't get opportunities like this every three, four, five years. These are 50-year opportunities," he says. "You need to continue to buy the cream. This stuff is still undervalued."
To be sure, though, there is plenty of bearish sentiment.
Hedge funds in recent weeks have been building short positions in both the Nasdaq and the Standard & Poor's 500. Insider selling has increased dramatically as well as the summer has wound down. Also, China's stock market continues to weaken, though a 6 percent drop Monday in the Shanghai index was met with a far smaller fall in the US markets.
Yet Bank of America-Merrill Lynch said in a research note Monday that the short-building is actually a contrarian bullish signal, while any pullbacks "are likely part of a larger base-building process."
A correction, then, could present a buying opportunity.
"We would definitely be cautious here," says Matthew Tuttle, president of Tuttle Wealth Management, in Stamford, Conn. Tuttle is long-term bearish in the market but believes the coming months will present windows to get in the market.
"At least in the short term, for the rest of the year, we would look at any correction—5, 6, 7 percent—more as a buying opportunity than real reason to panic," he says.
Broad market plays probably would work, according to Tuttle, who believes some of the energy and natural resources companies also should do well.
Finally, the bulls point to the lack of volume this summer as another reason to think there's room yet for the market to run. With the third-quarter winding to a close, they say, portfolio advisors and large-fund money managers who stayed in cash will be looking for entry points that would come with any substantial downturn.
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"These guys have to get involved not because they want to but because they have to," Alan Valdes, of Hilliard Lyons, told CNBC. "I think you are going to see money keep coming into this market until the end of the year."
The rally continued to have skeptics on the way up, and those doubts will continue.
But the reason why sell-in-May didn't apply this year was a lot of the horrible news the market expected never materialized. Instead, most of the market signals, even those that disappointed, were mostly dismissed. Earnings, meanwhile, beat expectations by a large margin, even though most of the beats were accomplished through bottom-line cost-cutting rather than top-line revenue growth.
If the trend of better-than-expected news continues, that would go a long way toward staving off any severe corrections.
"Markets always wipe out excesses and build a foundation again," Baum says. "The excesses have been wiped out and they're building on a foundation, and you're going to have a pretty good market going forward."
