XAO gains in May

The All Ords defied my expectations in May rising 2.1%. The XAO actually breached the 6000 barrier closing at a high of 6035 on May 19th only to shed -4.3% over the last two weeks. So what can we expect in June?

If we take a look at history, June has actually been the worst month in terms of how often it rises. In fact June is the only month over the last 23 years in which the XAO has been negative more times than it has been positive. The chart below shows that the month of June has only been positive 39% of the time or in 9 years out of the past 23.

So does that mean June has a high likelihood of being negtive? Absolutely not. However I do think it will decline because the deluge of data both economic and company specific will continue to come in on the negative side.

Despite the bottom-callers best efforts housing is still in the can and defaults on all kinds of credits are rising rapidly, whether it be mortgages, auto loans, credit cards, student loans or HELOC's. Not to mention the tapped-out consumer buffeted by high energy and food costs that is unable to tap the value of their home to fund spending.

Next Friday's US employment report should be interesting as well. Whilst intial unemployment claims are hovering around 370k per week, continuing claims are edging higher, showing that whilst job losses may not be huge, new jobs are not being created.

What are the risks to my outlook? Oil could retreat under $120 a barrell, causing the US dollar to stabilize and the stockmarket to rally. In fact Fed fund futures are now pricing in interest rate hikes by October. That is commensurate with the view that everything will be turning up roses in the second half of the year.

As often repeated here, I think this outlook is overly optimistic. Yes, spending will receive a boost via the rebate checks but the financial sector is going to do it tough as credit standards continue to tighten and banks are forced to raise reserve limits because of a tide of rapidly rising deliquencies. There is just no way the economy can put in a strong recovery whilst the financial sector is battening down the hatches.

Also, company profits will continue to disappoint. Currently 2Q08 operating earnings for S&P500 companies are expected to be down -6.1%. As has been the case for the past 3 quarters, it will be much worse than current expectations.

As usual I believe forecasting the short term direction of the stockmarket is a mugs game but I continue to do it because it provides a bit of entertainment. So after two consecutive monthly rises my view is that the XAO will decline in the month of June.