Rally Runs Its Course

NEW YORK (Real Money) -- On the morning of June 1, with the futures already down by 26 handles in the early going, I delivered the contrarian and variant view that we should be on the lookout for a rip-your-face-apart rally, citing Sir John Templeton, "The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell" (and technical analyst Walt Deemer the day before that, "When the time comes to buy, you won't want to").

A rip-your-face-apart rally could be, I surmised, the maximum pain trade given the broad de-risking by most investing classes.

With investor sentiment (individual and institutional) so downbeat, Wall Street strategists silenced and crestfallen (according to Mother Merrill, sell-side strategists are more bearish on equities than they were at any point during the collapse of the tech bubble or the recent financial crisis), expectations for worldwide economic growth and profits subdued, undemanding valuations, a five-decade high in risk premiums and a growing consensus view of "no way out" of Europe, the dour investment backdrop seemed to have the potential for a meaningful surprise to the upside for the U.S. stock market.

Ten days ago, I went through a number of conditions that could (either single-handedly or in a combination) contribute to a rip-your-face-apart rally.

• Europe: A more activist ECB surprisingly intervenes (before markets force them) in order to stabilize the growing debt crisis. The ECB lowers interest rates, reintroduces SMP to support the purchase of weak sovereign debt, endorses a bank-chartered ESM and introduces a FDIC-like deposit insurance program for European banks. The concept of eurobonds floated by a heretofore reluctant 17-country constituency could also be a rally catalyst.