A Summer of Discontent

• For the month of May, the Dow Jones Industrial Average tumbled nearly 8%, marking its worst May performance since 1940. Markets are whipsawing by several hundred points intraday, regulators still can't figure out what happened during the flash crash, Euro sovereign risk remains in the headlines, politicians in Europe, the US and Asia add to the uncertainty with increasing regulation, and saber-rattling in North Korea ups the level of geopolitical risk. With all the volatility and uncertainty, the prudent course seems to be to just back away to the sidelines and let the market action itself figure out what the next trend is. 
  
• The S&P 500 failed to recover its 200day MA at 1,104.86, after punching down to 1,040.78 or just below February's 1,044.50 low. While the S&P 500's VIX volatility index remains below the Lehman/AIG collapse high of 89.53, it is back to levels seen during the Bear Stearns and Fannie & Freddie collapses, and before that, the Asian Currency, LTCM and 9/11 crises. Volume has surged as traders/investors try to figure out if they want to be bearish or bullish.
  
• With virtually every major US and global equity index as well as commodities and other risk trades-- having dropped below their 200d MA, the prognosis is more technically bearish than it was at the end of the previous week.  While the Nikkei 225 rallied 190 points on Friday, it is now off 17.2% from an April 12 11,351.55 high, and trading well below its 200d MA, which is still well above 10,000. While the Japanese economic data is actually looking upbeat and consumer as well as corporate sentiment is improving, stock prices are more about foreign investor risk attitude, which for the past three weeks has been "sell Japanese equities first and ask questions later"
  
• Perhaps the best scenario for now is that markets remain volatile and choppy as downside support levels are confirmed over the next several months i.e., through the summer, which is the old "sell in May and go away" routine. Our main scenario remains for an extended trading range as stock markets transition from excess liquidity to economic and earnings-driven fundamentals, while the probability of a break down to new lows and resumption of a secular bear market is not zero.
  
  

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