May was maddening, but June offers its own perils

May is one of those months that drive investors nuts. Since 1999, stocks have risen six times in May. The modest decline for May 2011 is the sixth.

June could be equally tricky. The Dow Jones industrials ($INDU) have fallen in June in each of the past five years. The Nasdaq Composite Index ($COMPX) has dropped in June in five of the past six years.

And, as Tom McClellan of McClellan Financial Publications noted as the week began, "stock prices really need to continue upward next week in order to keep from rolling over into a serious downtrend." He got his wish Tuesday, when stocks ended May with a strong rally.

But the issues that bedeviled the stock market for most of the month were and are still in play: weak domestic economic and job growth, a difficult housing market, high commodity prices and the money betting commodity prices will move higher, and turmoil in European financial markets.

And, of course, the uncertainty over how the federal government's debt ceiling will be raised.

Article continues below.The Dow ended May off 2.4%, with the Standard & Poor's 500 Index ($INX) off 1.4% and the Nasdaq off 1.3%.

This was a market to be defensive in, probably through the summer.

No surprise that tobacco, health care, telecom and utilities stocks were the market leaders. Especially after the big commodity bust that pushed silver down 21.2% during the month. (I'm not making this up.) Or crude oil, which was off 9.9%.

We got no real help from Apple (AAPL). Its shares were off 0.7% for the month. Google (GOOG) was down 2.8%. JPMorgan Chase (JPM) was no better, down 5.2%. Caterpillar (CAT) was off 8.3%.

Where you could make money was in Green Mountain Coffee Roasters (GMCR) and video-game-maker Electronic Arts (ERTS), up 23% and 21% for the month, respectively. But those were outsized returns. In fact, only nine Dow stocks were higher. Some 236 S&P 500 stocks had gains, along with 42 Nasdaq-100 ($NDX.X) stocks.

Where you could also make money was in bonds, as interest rates fell. By definition, bond prices had to go up. Result: The iShares Barclay's 20+ year Treasury Bond (TLT) exchange-traded fund was up 3%. The iShares 7-to-10 Treasury Fund ETF (IEF) was up 2.2%.

So where will the market go next? Well, it does face some headwinds:

High oil prices. Middle East turmoil has pushed oil prices higher this year. And no one has found a way to replace Libya's daily production of about 1.2 million barrels. So prices may have a floor underneath them. But demand is falling in the United States and Europe. That has forced prices lower. People will change habits if the price is high enough.

A weak housing market. Since 2009, analysts have predicted a housing bottom next year. We're talking 2012 now, maybe longer.

Political gridlock. This is a problem in Britain, Europe and the United States. Only, the stakes are much higher. Greece may be small, but a controlled default on its debt could threaten the stability of the European banking system. Just as the Lehman Bros. failure did in 2008. The debt ceiling problem in the United States could shut the government down. The big question is how much the ultimate solution will shave off the economy.

The end of quantitative easing. This is the program the Federal Reserve implemented to add liquidity into the domestic banking system. It definitely boosted stock prices. It's effect on the economy may have been less than hoped for. But no one else would do anything. The program ends June 30, and the question is whether the economy is strong enough to get along without it.

But the market has some things going for it:

A stronger economy. It's true that the recovery has hit a soft patch, and it's not yet clear what that means. Wednesday's auto sales may offer a hint. But jobs are still a huge problem and will be for some time. Part of the soft patch the economy has entered is a result of shortages created by the March earthquake in Japan. Japanese production will start to ramp up again this summer. That should help the U.S. economy and stocks.

Low interest rates. The Fed will not raise rates anytime soon. The earliest will be next year.

A low dollar. Everyone may say he hates the dollar's current levels. But it's great for exports.

Lower inflationary pressures. Crude oil has fallen back. Cotton, corn, wheat and coffee have dropped. There's talk that Russia will allow grain exports again. With unemployment hovering around 9%, there are no real wage pressures.

A good technical finish for May. The Dow, S&P 500 and Nasdaq ended higher for a fourth straight day Tuesday. Yes, the gains were modest except for Tuesday. As important, the S&P 500 dropped below its 50-day moving average last week. But it ended Friday above that important signal of investor confidence. At Tuesday's close, the index was 1.1% above its 50-day average. And for all the concern that the market was about to fall apart, the S&P 500 was never more than 3.5% off for the month. That's another signal of longer-term confidence.