For stocks, May is "show-me time." For the past month, there has been an asset class trade: out of cash and into high-beta stocks like tech, financials, and consumer discretionary.
Much of this is based on the hope of some kind of bottom in the economy.
Now, it's show-me time. The gains will not be as easy from here on out. Traders will need to see some clearer evidence that the economy is really improving. If not, we will see stocks move down in the summer.
A good example: retailers. They are among the most heavily shorted names on the Street, but April has seen huge gains:
Macy's up 53%
JC Penney up 51%
Nordstrom up 35%
Bed Bath & Beyond up 23%
Target up 19%
Gap up 19%
Don't kid yourself: these kinds of gains are not just short squeezes. Investors--real buyers--are getting in on early indications that business is not getting worse and on the hopes of "normalized" 2010 earnings.
But 2010 is a long way off. The good news is that retailers are proving adept at cutting costs, and it’s clear that rather than simply seeing dozens go out of business, we may see more survivors getting by on lower volumes.
But "less bad" will only work for a while; we do need to see some pickup in demand at some point this summer.