Why this summer is a bad idea

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Why this summer is a bad idea

It's June, and the summer doldrums have already arrived on Wall Street.

We might expect a few fireworks from the job numbers Friday morning, but this is the time of year when the tape trends quieter - on average.

In a year that's been anything other than average, the danger is that any shocks will be magnified, as investors scramble to reposition themselves in a shallow market.

The secular trend in electronic trading is causing uncertainty in both stocks and bonds, leading to a drop in liquidity in both stocks and bonds.

When you need liquidity, it's only a matter of time. But conversely, it's in the lowest supply when it's needed the most. I like it during a game-changing repricing of risk.

Investors now expect the Federal ReserveFederal Reserve to stay pat this month, which is expected to be the first time this month. But this conviction seems loosely held, with bets placed on another rate hike from the Fed as recently as last Friday. Fedspeak earlier this week flipped the odds back into the camp of those looking for a pause.

In the stock market, optimism for AI and confidence that the earnings picture may turn out better than feared have boosted some of last year's biggest losers and lifted investor spirits.

And Friday's jobs report offers the possibility of changing the story for markets right now.

A huge increase in employment could reverse expectations for the Fed's next move. A surge in unemployment might happen in the opposite direction, just in the opposite direction. With liquidity light, placing bets on these outcomes proves even more perilous.

There's an old investing adage that says investors should sell in May and go away, highlighting the fact that many large investment shops will simply shutter their doors in early summer only to reemerge in September.

But this advice probably should have been, Hedge in May and go away. On June 13 we'll get the May consumer inflation report right before a second critical Fed meeting. Repeat the game theorizing exercise as appropriate — then do it for June, July, and August data.

What are the chances we will not have a major surprise this summer given all the variables? Investors who are not prepared for this market environment may wish they had sold in May.

The bottom line for investors is that any deviation from the prevailing narrative - an admittedly loose and fluid phrase - could shift Wall Street's positions on their heads in a massive pain trade.

A reversal even ChatGPT might not be able to undo.