Financial markets are priced for ISM in the low 50's. There is much bad news in the price about Europe, financial regulation, and fears about a China bust. "Buy the dip" is seductive and may prove right. Risk aversion episodes are typically short lived. A quiet first couple of months of summer are certainly possible. The problem with this view is it that it looks highly consensus.
Tobias Levkovich, the US equity strategist at Citigroup Global Markets, wrote last Friday:
Recent events generate incremental risks. The escalation of tension in the Korean Peninsula, further bank and credit problems in Europe, as well as the apparent weakening of US lead indicator momentum are contributing to a growing sense of despair within the investment community. At the same time, many market observers are seemingly trying almost desperately to call a bottom. In this context, the bad news is beginning to get priced in but there’s no specific catalyst for a turn in stock prices beyond short-term relief rallies from oversold conditions even as the Panic/Euphoria Model plunges into “panic” territory.
Click on charts to enlarge, courtesy of Citigroup Global Markets.
Bad news is BEGINNING to get priced in?