Is risk back off?

On the last trading day of May, the Dow Jones Industrial Average (chart) sold off by 208.96 points, the Nasdaq (chart) -35.38, the S&P 500 (chart) -23.67 and the small-cap Russell 2000 (chart) finished the day lower by 10.28 points. Is this a possible prelude for the month of June? After the six-month+ run that stocks have been on, one has to wonder if these markets are poised to correct?

As I wrote in mid-May, I expected volatility to begin to increase, and sure enough the VIX (chart) also known as the fear gauge spiked 27.5% over the past two weeks. Ever since the Fed began mapping out an exit strategy, the market chatter has steadily increased as to how stocks and bonds would react. Furthermore, since its May policy meeting, the Fed has had a difficult time communicating its position as to how it will move forward. I know that some type of jaw boning needs to occur in order to prepare the markets for the beginning of monetary easing. However, a policy statement at the beginning of May indicated that the Fed’s next move could either be up or down? Confusing isn’t it? So it’s no wonder some sort of fear has begun to creep into these markets.

That said, this has become such an unprecedented market environment, I don’t know what to think right now. Isn’t the job market, corporate earnings, and top-line growth supposed to drive stocks? What I and many on the street are concerned with is the day the Fed decides to begin its wind down, how will equities react? Next week I will be paying close attention to the plethora of economic reports that will be issued which includes the PMI and ISM manufacturing indexes, the Beige Book and of course the all important Jobs report which will be issued on Friday before the market open, just to name a few. If the economy can begin to demonstrate meaningful strength, then any type of pullback or correction will most likely be met with wide support. However, if economic numbers stay weak, then we could very well be in for a lot more volatility this summer. Good luck to all.

Have a great weekend 🙂