Any Chance Of A Summer Rally?

What are the chances that stocks shake off their late Spring funk and exert some form of rally? Let's take a look and see if the ingredients are in place.

Investor Sentiment: Presently, fear permeates the market place (particularly, in the before mentioned three key sectors in 2006 of commodities, energy & foreign markets, especially those of an emerging kind). Contrast this with market sentiment at the end of April which basked in the glow of a rising tide in the most speculative sectors.
Volatility: Both in time and price, the recent decline has been historic as liquidity has been withdrawn from the markets and most of the winning trades of early 2006 have been unwound.
The Federal Reserve: The Fed has in effect used its public podium to telegraph future rate increases at least in regards to June and likely in August. They have been able to do this without raising interest rates in the interim interval. While many blame the new Fed Chairman for a two faced approach to the public he has in essence jawboned the markets by reducing investors exposure to risk in speculative sectors while at the same time reducing the equity risk premium to more normal levels. In particular his words and actions have impacted both corporate and consumer actions while at the same time leveling out commodity prices. .
Proprietary Measures: Many of you are aware that I follow 14 proprietary measures of investor sentiment and indicators which measure money flows into and out of the markets. These measures have deteriorated to levels that are consistent with prior market bottoms.
Investor Disgust: The options back dating scandal as well as the culmination of the Enron trials have brought out the usual naysayers (perhaps more openly at this time) that equities should be avoided, the market is rigged and all corporations are crooks. This is typically a contrary indicator.
Inflation: Inflation fears seem to have now been priced into stocks.
Valuation: Per my previous posting on PE's stocks are now at levels where they have historically found value. Consensus S&P earnings expectations remain high but are beginning to move lower, and stocks seem to have already discounted a possible slowing of earnings either later this year or in 2007.
Corporate Actions: "Watch what they do, not what they say" is an old investment saying. Corporate America has been very active in 2006. The level of corporate buybacks, mergers and takeovers is close to historic levels. Investors might not think the markets are cheap but corporate America by their actions is saying stocks are attractive.

Muted Rally Must Wait Until After The Fed. Stocks could be poised for a summer rally and not the beginning of a rip roaring bull market. Stocks are like a coiled spring after their recent pasting and are just looking for an excuse to rise. But the market is likely going nowhere until after the Fed meeting June 21-22 and the almost certain 1/4 point rise in interest rates. A summer rally is possible after that point but issues such as slowing corporate growth, uncertainty regarding our fall elections, rising international tensions & late summer lethargy are likely to put a cap on any rebound before Labor Day. We will monitor our indicators over the summer (as well as go into more detail about what they are and how they work) and be prepared at that point to get more defensive if we need to. But for now a rally is more likely than not after the Fed meets.

A business note!!!!!! I am going to be in and out of my office on business and some personal matters over the next two weeks so posting is going to be very light to non-existent. Look for more posting and more detail after the 4th of July.