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TheStreet Open House

Are You Ready for a June Swoon?

NEW YORK ( TheStreet) -- After a positive month, bulls are thumbing their noses at the "sell in May and go away" crowd. But just ahead lies the potential for some serious gloom and doom in June.

Here's what to watch for as we head into the crazy, hazy, lazy days of summer.

A cluster of Hindenburg Omens: Named after the famous crash of the Zeppelin Hindenburg, the Hindenburg Omen is designed to warn of potential serious declines in the stock market. We've had two now in the last six weeks, with the first one coming on April 15 and the current one on May 29. The more that cluster, the more accurate the indicator tends to be.

The Omen is made up of a number of factors, including breadth indicators, moving averages and the McClellan Oscillator, and Hindenburg specialists note that the last confirmed occurrence was logged in October 2007. It correctly predicted market swoons in 1987 and 2008, but skeptics point out that it has only a 25% long-term accuracy rate.

Economic and market disconnects: Economic fundamentals and stock market action have been on a diverging course since the recent rally started in April. Across the board, economic fundamentals have weakened while the major U.S. indexes were setting record highs on nearly a daily basis.

Europe is clearly in recession, China is slowing, U.S. consumer spending and incomes are stalling and major commodity markets like copper, lumber and gold all point to a global slowdown. Volatility in Japanese financial markets has gone parabolic and regardless of Federal Reserve easy-money policy, markets cannot ignore economic fundamentals forever. As these disconnects grow, it becomes increasingly unlikely the United States equity market can continue marching higher on a solo path and totally out of synch with the rest of the world.


U.S. corporate health: The PC market continues to languish. Wal-Mart's (WMT) results point to a stressed consumer, and in a little-reported event last Wednesday, Moody's downgraded Alcoa (AA) to junk status. Alcoa's credit is now Ba1 with a stable outlook, which is significant because Alcoa is a member of the Dow Jones Industrial Average and widely seen as an economic bellwether in its position as a major global aluminum supplier.

A slowdown in demand for aluminum is viewed as a precursor for slowing economic activity, much like copper and lumber, and so weakness here confirms other indications of the slowing worldwide economy. Alcoa typically kicks off earnings season, and so its next report in early July could be interesting and will be carefully scrutinized for signs of weakness in the macro economy.

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