May Rout Leads to June Rally

On April 6th, just after US stocks touched a high for the year and climbed to within 10% of the all-time high set back in October 2007, we wrote: 

"The market will do one of three things over the rest of the year:

  1. Trade flat for the next 9 months - not likely.
  2. Surge into a "buying panic" as investors finally jump back into stocks, which would leave the market up 20% or more by year end.
  3. Plummet as some exogenous event (like last year's Japanese tsunami or the Greek credit crisis) cause investors to retreat to cash once again."

We got three "exogenous events" in May:

  1. Greek credit crisis resumed, with Greece likely to exit the Eurozone this summer.
  2. JP Morgan Chase lost $3 billion on Credit Default Swap trading.
  3. The FaceBook "FacePlant".

And on June 1st, the Labor department reported a minimal gain in jobs, which has economists worried anew about the United States returning to recession.

So from the high on April 2, to the low on June 1st, US stocks sank 9.9%. Unfortunately, human nature focuses more on losses than on gains. Stocks remain 81% above the March 9, 2009 low, and 18% above the October 3rd low. But as we saw today (best one day return of the year,) universal bearishness tend to lead to outsize upside returns.

Read the entire commentary here.