Complacency Rules, as in, Is King

Top Line: With the month of May behind us, our short positions are mostly in place. We have some reason to think the rally may be over and, if not, will be over by Friday's report on jobs. Similarly, we purchased some T-bonds last week in the form of TLT. We still have a little powder dry and if any opportunities crop up this week, we'll try to take advantage of them.

The big event of the week will be the jobs' report due out on Friday. We don't think there is any reason to expect that it should have any particular impact on trading except that we think it just closes the window on any further upside in the stock market. Again, we have no reason to think this report holds anything important.

Looking at the stock market from last week, there seemed to be a steady upward movement in the major indexes. Our own FSI was up all four days. With it being the last week of the month, that shouldn't surprise us but we really thought there might have been a chance to get something different this monthend.

May did bring a good opportunity to sell. Remember the theme of sell in May and go away. That couldn't be a more true philosophy this year. Stocks should generally have trouble until September just a few weeks before the election. There could be some extreme rallies along the way but there should not be a rally back above where we are now.

And, where is that? The Dow is struggling to get back Up to the 12,750 level. That number has been a support or resistance level for quite a while now. Looking back to February of 2007, we can see the Dow bumping its head on 12,750 for the first time. Since then, we have seen several touch points on that level. The important point here is that the Dow has not advanced since Feb of 2007. People are still bullish...

That leads to the other item of interest, the volatility indexes. These indexes, VIX and VXO, have come back down to the level they were at back at the October highs. This means that traders do not seem to be any more concerned about a stock market drop now than the did back in October. You my recall that the Dow was trading just over 14,000 at that time. This is our classic definition of complacency...something we think coincides with this intermediate top in the major indexes.

We leave you with a couple of articles for reading. Both are from the NY Times and may come with a few ad's but the articles are pretty good. The first is about the higher end residential real estate market and the other is about the CDS market written by one of our favorite journalists, Gretchen Morgenson.

Thanks for the anecdote about the real estate market, Erick. The seven year break even point in real estate doesn't correspond well with the "real estate always goes up" theory. Real estate is going to be a problem for quite some time. Be careful.

FSI: 96.63 (still down 9% on the year, so far)

We were hoping to put up some additional pictures of Jackson but that will have to wait until tomorrow.