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Summer Of Discontent III

Daily State of the Markets
Friday, June 1, 2012

Good morning. Sell in May and go away. It appears that is just about everything an investor needs to know these days. You see, selling in May certainly worked well in 2006, it eventually saved you some pain in 2007, was prophetic in 2008, modestly profitable in 2009, very helpful in 2010, a life saver in 2011, and a darned good idea this year as the S&P 500 fell -6.27% last month.

To be honest, I'm not completely sure why this old Wall Streetism works. But this year the reasons were pretty simple as it appears that investors are headed for yet another 'Summer of Discontent'. And while we do believe that the market is holding up better this summer than it has in the last two, the action in May has reminded investors that it was time to yank money out of the market as the fund outflows continue to mount. I guess some prophecies do tend to be self-fulfilling.

What's there to be worried about, you ask? I know, I know, nobody is really asking that question because everybody on the planet already knows the answer. However, just in case you've recently crawled out of a cave, let's run it down. First and foremost there is the fact that the BTE theme has been debunked as the vast majority of economic data here in the U.S. has suddenly become WTE (weaker than expected). And while we can argue until the cows come home about whether or not the slowdown in growth will accelerate, there is little doubt that growth is indeed slowing in the good ol' USofA.

Now toss in the fact that China's rip-roaring economic growth has been downgraded to torrid, the ongoing nightmare in Europe (new to this year's edition are the bank runs which are very hard to stop once they get started), and the upcoming budget/fiscal battle here at home and you've got a handful of pretty darned good reasons to do something besides watching your stocks go down this summer.

But before you throw in the towel on your Apple (NASDAQ:AAPL), your Google (NASDAQ:GOOG), your Wal-Mart (NYSE:WMT), your Monster (NASDAQ:MNST), your Coca-Cola (NYSE:KO) or even your SPY's or QQQ's, we should recognize that there are ways to deal with the now all-too familiar summer swoon.

For starters, it is important to understand that the mess in Greece is going to eventually get straightened out. And by eventually, I mean June 20th or so. With Greece's election do-over slated for June 17th, we should know within a couple of days whether or not the embattled Greeks are going to stick around the Eurozone or try to go it alone.

However, given the fact that there is now a fast-growing crisis of confidence in the European banks (Spanish banks have seen withdrawals of €66 billion recently - and that was BEFORE the trouble with Bankia began) and that this may require some actual action by the EU leaders (not their strong suit), the very first thing investors/traders should do during the current 'summer of discontent' is to recognize that the game is going to be difficult for a while. Thus, it is important to play "small ball" here by keeping positions small and taking less risk (lower beta) on the positions you put on.

One of the simplest approaches to the summer months is to simply raise a bunch of cash and wait for the maddening, news/rumor-driven environment to subside. However, the problem here is that unless you are reading Daily State of the Markets each day, you may not know when the environment actually does change and thus you could easily miss out on the next big opportunity (which will surely arise at some point this year).

Another way to play is to hedge your bets by writing covered call options or by adding some SH, SDS, SPXU to the long positions you want to hold.

Finally, we've found that utilizing a shorter-term approach to your trading is vital in this environment. So, with our Market Environment Model currently in Neutral (indicating that the market is "iffy") at the present time, we will focus on the shorter-term trends in the market. Recall that last summer the market would blast one direction or the other for several days and then reverse. Such an environment is perfect for short-term trend following systems. However, it is important to note that the chances of getting whipsawed are much higher than normal in this type of environment; so again, playing the game cautiously makes a lot of sense during this 'Summer of Discontent III'.

Turning to this morning... Although there is some big data on tap, the PMI's out of China and Europe have put traders on the defensive in the early going.

On the Economic front... The Labor Department reported that Nonfarm Payrolls gained just 69,000 in the month of May. The increase in the number of new jobs was well below the consensus estimates for an increase of 158K and was below April's total of 78K (revised down from 115K).

The nation's Unemployment Rate rose to 8.2% - expectations had been for the rate to hold steady at 8.1%.

In addition, Personal Incomes rose by +0.2% in April, which was below the consensus expectations for an increase of +0.3%. Personal Consumption for the month increased by +0.3% which was in line with the expectations for +0.3% but above the March reading of +0.2%.

Finally, the Core PCE (an indication of inflation) was reported at +0.0%, which was below the consensus estimates for an increase of +0.2%.

Thought for the day... Best of luck on this Friday and be sure to enjoy the weekend!

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

  • Major Foreign Markets:
    • Australia: -0.41%
    • Shanghai: +0.05%
    • Hong Kong: -0.38%
    • Japan: -1.20%
    • France: -1.41%
    • Germany: -2.38%
    • Italy: -0.50%
    • Spain: +0.38%
    • London: -0.67%
  • Crude Oil Futures: -$2.25 to $84.28
  • Gold: -$12.50 to $1551.70
  • Dollar: higher against the yen , euro and pound
  • 10-Year Bond Yield: Currently trading at 1.530%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -24.47
    • Dow Jones Industrial Average: -183
    • NASDAQ Composite: -45.18

Positions in stocks mentioned: SPY, SSO, MNST, KO

For more of Mr. Moenning's thoughts and research, visit

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Disclosure: I am long SPY, SSO, MNST, KO.