So much for selling in May

The old adage inviting traders to book springtime profits before heading for glorious sunshine in the Hamptons hasn't really done much good so far in this summer. The S&P index stood at around 916 at its best in May before sellers forced it to 875. Since then a new high for the year has been recorded with the market up 5% off its May-time lows. Either summer is late this year - and with a record wet and cool month of June that's a real possibility - or a genuine rally is afoot.

The fact that the stock market is recovering from a kamikaze-style dive following the Lehman's bankruptcy when it continued for a further six months before finally hitting the target, may mean that this summer is different. Why might this be?

No matter how draconian any of us chooses to be about the calamities associated with the financial meltdown, the hard-hitting reality is that we're all still very much alive and kicking. While unemployment might be reaching 10% in the United States, employment is at 90%. And for those of you that have a distaste for the French, it's safe to tell President Sarkozy that he was a little off the mark with his post-Lehman debacle comments when he announced with glee something along the lines that, "we're all socialists now." If you choose to raise a finger as you point this fact out to him, that's your call.

There are several key indicators pointing to recovery, not least of them the Conference Board's key leading indicator. Having become accustomed to none sloppy performances in a row, the index turned around in April and maintained its composure in May.

Of course the drastic government and Federal Reserve Bank action have played a big role in preventing a deeper slide. But even slashing interest rates to zero has its problems. Credit remains a scarce commodity and that has hampered the recovery drive. Only last week did JPMorgan Chase and Bank of America announce a return to the jumbo mortgage market (they're the silly super-sized loans for ordinary income folks who want to spend lots of money on a house!).

The recent jump in yields over worries that the U.S. government didn't have a large enough check book has also reversed course. Yields have slipped from 4% to about 3.5%.

Still, the fact is that the economy did grind to a halt in the spring. Subsequently, auto sales and intentions to build new homes have both picked up. Indeed, the picture around the world is representative of a scenario where the excess dried up dare we say "to excess" leaving manufacturers out of stock. That means that they were extremely sensitive to a return of demand. This explains much of the euphoria with the thawing process.

Stock market valuations got to rather weak levels, fitting of any market meltdown. The S&P 500 index is trading on a forward 12 months price to earnings ratio of 15.6 times and less than half its 35.4 times of exactly one year ago.

We admit, we're a long way from being fully convinced that China and the Pacific region will lead the world out of recession based upon a Chinese stimulus package that has the locals building bridges until manufacturing export demand returns. The U.S. consumer - the bastion of world demand - is too busy waving at Monsieur Sarkozy to care about Chinese recovery. And while they're busy, so long as economic data doesn't get worse, the equity market might continue its rally. Who are we to stand in the way of a good old rally?

The Supreme Council of the Secret Order of Jurojin