Technical Outlook
The major indexes are still trying to put in a short- to intermediate bottom, in our view. Each test has been successful thus far. While we think that the market is close to a tradable rally, the indexes are very close to near-term chart support and any meaningful break (greater than 1%) below the recent closing lows would imply further downside, in our opinion. Bond yields have been holding near 5%, while crude oil has been stuck in a fairly narrow range.
Market sentiment remains fairly cautious, which should be a plus once it starts to move back to the bullish side. Overall put/call ratios remain extremely high, equity-only put/call ratios are starting to rise, while OEX put/call ratios dropped sharply and are approaching bullish territory. Both overall and equity-only put/calls are contrary indicators; OEX is a coincident indicator.
Longer-Term Economic Outlook
Incoming data continues to suggest that the economy is slowing, but inflation remains a threat. The evidence this month generally supports a pause at the June 28-29 meeting of the FOMC, in our opinion, but a renewal of tightening is possible if either the economy reaccelerates or inflation rises more rapidly than we expect.
Bernanke's June 5 speech stressed the need to control inflationary expectations, but also pointed out the slowing U.S. economy. We think this is still consistent with a pause at the June 28-29 FOMC meeting.
