The worst June for the Dow since 1930, the best commodity bull run since 1973. Time for some reversion to the mean in the second half? I'm closing my short future positions opened back in early May, as the balance of short term risks is no longer blatantly to the downside. Bear markets are notorious for furious rallies, and even though I'd expect at worst a further 10% decline in the S&P to make a classic 30% decline peak to trough from last October's highs, the potential for a tradable upswing from technically oversold levels is high. We have not seen a cathartic risk aversion spike like that in March, as reflected in the VIX and trading volumes, but short positions are at record levels, investment sentiment has plunged (whether measured by the Merrill institutional survey or the bull/bear balance among investment letter writers) and the hysterical tit for tat downgrading between bank analysts in a financial equivalent to the Cold War doctrine of Mutually Assured Destruction, will eventually run its course or they'll all be unemployed (see chart below from Bespoke Investments charting the impact of brutal recent downgrading in the sector). In investment banking, there's nothing like contrite analysts finding religion.

I think the VIX issue is a red herring, to the extent that this time we don't face a systemic crisis of potentially huge magnitude, but simply the grind of commodity driven margin pressure and ongoing deleveraging. GM and Ford are business dinosaurs whose failure to evolve their product offering intelligently has sealed their fate, so what? US airlines are equally uncompetitive internationally and taken a disproportionate hit from fuel prices. Two factors will prove key to the market's performance for the second half. Firstly, is the US housing market bottoming? The number of previously owned unsold homes on the market at the end of May fell 1.4 percent to 4.49 million, representing 10.8 months supply against the 5/6 mth supply agents say would reflect a balanced market, so we have a long way to go but the key is momentum. If the US housing market can just stabilise in most regions and bounce along the bottom for the next couple of years, it removes the apocalyptic downside risks now discounted in the banking sector, which would rally strongly. Perhaps the last word on believing the housing 'experts' should go to famed journalist Barbara Walters, who was offered a prime Manhattan condo for $250k in the late 1970's real estate slump; her then boyfriend, a highly regarded financial guru, told her to pass, never catch a falling knife etc. It's recently been valued at $30m. His name? Alan Greenspan (that anecdote explains a lot really).

Secondly, when will oil prices peak? The argument about whether this is a bubble is tiresome, and there is only one way to find out, by tightening regulation on both non-commercial trading and margin levels. The CFTC is under such intense pressure politically that such a move is highly likely this Summer, and we might at last see fundamentals reassert themselves (and oil trade down to either side of $100) which would turbocharge an equity rally. That's assuming Dick Cheney and his wild eyed zealots haven't started a war with Iran in the meantime of course, in which case all bets are off. Both of these factors will determine the path of US consumer spending, and thus earnings across the discretionary consumer sectors which have been hit hard in the latest selloff. The markets are manic depressive by nature, so sooner or later we're due a little mania. Time to swap put options for Prozac.