Will the ASX soar in the second quarter of 2015?

Australian investors have been treated to an exceptionally strong performance by the S&P/ASX 200 (Index: ^AXJO) (ASX:XJO).

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What: It was a strong end to trading for the month of March yesterday with the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) gaining 0.8% to close at 5,891. Gains were experienced right across the bourse with all 10 sectors gaining ground, led by the Materials sector which added 2% for the session.

The solid rise on Tuesday also brought to a close a very impressive March quarter which resulted in the index rising 8.9% for the first three months of calendar year 2015. To put this gain into context, it is reportedly the best March quarter performance in nearly a quarter of a century!

So what: While the strong gains in the past three months are indeed impressive, it's important to keep them in context. Looking back over the past 12 months the index is only up 9.25% which is much less exuberant.

Perhaps more worrying is the huge gains which have been experienced by some blue-chip stocks in what is generally being described as a 'chase for yield". Nowhere is this more evident than amongst the banks – Commonwealth Bank of Australia (ASX: CBA) has rallied 20.9% in the past year and income favourite Telstra Corporation Ltd (ASX: TLS) has soared 26.1%.

Now what: With the index level of 6000 points tantalisingly close it is a case of when, not if, the market will reach this psychologically appealing point.

In the short term the market might go higher, or it might go lower – certainly it would be unusual for a repeat performance of high-single digits to be achieved in the next few quarters, however, the real question is fundamentally what level should the market be at?

With stock valuations looking stretched in many cases, sideways trading or a correction (large or small) certainly shouldn't be ruled out and practicing a higher level of caution could be a sensible strategy.

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policyThis article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.”

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