With the VIX closing at 40.10 on May 21st and correlation across almost every single asset class locked at 1.0 it would appear that investors are battening down the hatches early for what the National Oceanic and Atmospheric Administration (NOAA) says could be the busiest hurricane season since 2005. The federal weatherman (imagine the chance of being right when you put those two together!) believes there is a 70% chance of 14-23 named storms of which 8-14 could grow into full fledged hurricanes. "If this outlook holds true, this season could be one of the more active on record", said Jane Lubchenco a NOAA administrator.
The forecast of storms ahead seems like little else but more of the same as Fitch arrived late to the downgrade party on Friday knocking a notch off of Spain's debt putting it at AA+. If the CajaSol conundrum turns out to be more than an isolated incident Fitch's forecast will look timid at best with NOAA having a higher probability of being correct.
The move in the S&P 500 from the intraday high of 1219.80 on 4/26 to the 1040.78 intraday low on 5/25 came to 14.68% which is a healthy number for a correction but no so robust that crossed over the technical definition of a bear market which wakes from its hibernation at 20%.
Whether we get there or not is still for the future to decide but strategists at HSBC found that the timing of this correction is in line with others they looked at going back to the 1940's and averaged around 12% which is the number for this one if you look at closing levels. Additionally, the Bespoke Investment Group found that a drop similar to May's produces double digit gains in the following three months.
The American Association of Individual Investors (AAII) weekly poll showed 51% of its respondents to be bearish last week while 30% still had their horns on. This number is used by some as a contrarian indicator and to the extent that it is true it supports the move in the Bloomberg Financial Conditions Index which closed last week at -1.027 after hitting a low of -1.530 on 5/20.
Morgan Stanley's global strategist, Gerard Minack, thinks, "there is a risk the growth slowdown is more pronounced in 2011, but we doubt investors will see enough news to price in such a risk in, say, the next one or two quarters".
Thomas J. Lee, J.P. Morgan's head of U.S.