HERE IT COMES

While trading volume in August was the lowest in 5 years, September promises much more volume and volatility.   Kids are back in school and traders have taken the last of their summer vacations.  Combine that with the huge market making events over the next few days and the stage is set for  a make or break moment in this enduring Summer rally.  The key dates over the next couple of weeks are:

• September 6 - The European Central Bank meets in Frankfurt, Germany.  The markets are expecting a few more details of Mario Draghi's promise of a couple of weeks ago to do whatever it takes to save the Euro.  We'll see.
• September 7 - The August Non Farm Payrolls and Unemployment report is released.  Strength or weakness here will be evaluated to determine the likelihood of further easing by the Federal Reserve.  A weak report will likely give the Fed cover to announce more easing.  A strong report will be good for the economy and will likely preclude Fed action.  Either of these two would produce positive results for the markets.  In this case, the worst case would be a jobs report that is neither too cold or too warm - the Fed probably would not act and the markets would not get excited about the future prospects.  
• September 12 - The German Constitutional Court meets to determine the constitutionality and legality of the European Stability Mechanism (ESM).  This will be a very significant conclusion as the ESM is key to the possibility of a European solution to their debt crisis.
• September 12-13 - The Federal Reserve meets to determine if the US economy is poor enough to justify another round of quantitative easing or some other fiscal stimulus.  The announcement will come the afternoon of the 13th and it is widely expected that the Fed will act.  Any disappointment will lead to a sell-off in the markets.

As you can see, the next two weeks hold the key to the remainder of this year (maybe longer).  Hopefully, we will begin to get some clarity over the next 10 days.  Hold on - things are about to get interesting!

ON A KNIFE EDGE

The markets sold off today on some less than inspiring economic news and lowered expectations of what Ben Bernanke may or may not say tomorrow.  The Dow sold off to the psychologically important 13,000 level and the S&P fell to the 1200 level.  The 1200 level is both psychologically and technically important.  A breach below this level would set the stage for lower prices.  The low volatility that has characterized this market over the last couple of weeks was interrupted today and we may well have another volatile day tomorrow as Bernanke provides clues as to the Fed's thinking.  While many expect nothing to be done tomorrow, the contrarian in me wonders...  We'll know tomorrow.  Bernanke may well want to wait to survey the upcoming jobs report before the next scheduled FOMC meeting in two weeks.  If the Fed is going to announce any new measures, the September meeting would be the logical time as October gets even more politicized.  Again, we'll see.  We are watching closely and will make appropriate portfolio adjustments as the market dictates.

BAM MARKET WRAP - BREAKOUT OR FAKEOUT?

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HO HUM

The markets continued their meandering ways today with the S&P barely moving above the flat line.  Over the last 6 trading days the S&P is up .3% with extremely low volatility.  With options expiring Friday and more earnings after the bell today, volatility could pick up.  Volume has been anemic, which is typical of this time of year, which can make for sudden moves either way.  Certainly volatility will pick up significantly with the Fed's meeting at the end of this month and the European Central Bank's meeting in early September.  It is no secret that the market is betting on either Bernanke (Fed) or Draghi (ECB) coming to the rescue in the next month.  A disappointment from either could start a significant sell-off as the market doesn't like surprises and at least some of the potential accommodative policies have been baked into stock prices.  Bernanke is in a bit of a hard place.  He knows that Wall Street is largely expecting him to act in two weeks but while the economy is struggling it is showing slow improvement.  Additionally, with a 1.5% economic growth rate the market is already ahead of itself by many measures and any Fed easing would only serve to further the over-reach.  Finally, Bernanke has made a point to try and separate politics from his job function and the closer we get to the election the more it looks like any move is politically motivated (whether true or not).  Draghi has his own challenges in trying to pull together consensus from all of the Euro Zone members and getting Germany to sign off on any new plan.  All in all, risk remains high in our way of thinking. 

There are currently a number of conflicting signals.  Bond yields have gone up significantly in the last week (indicating money coming out of bonds) and yet stock prices have remained relatively flat.  Generally, rising bond yields (especially from the low levels of today) would indicate a major shift from bonds to equities but we are not seeing a commensurate rise in equities one would expect from such a large move in yields.  Something will have to give soon - either stocks will rise in conjunction with yields or yields will turn down again and stock prices will follow.  The Vix is also a little confounding here.  The Vix measures the volatility in the market and a low Vix usually indicates higher prices while a higher Vix usually indicates higher risk and lower prices.  Currently the Vix is very low by historical standards and reflects a measure of complacency and/or expectation of still higher prices.  This may be a reflection of the market's expectation of Fed action that puts a floor on just how low this market could potentially go.  In any event, the declining Vix is not consistent with the stock market action of the last week or two.  This market is acting very strange which causes us to take note and wonder what is going on behind the scenes.  We have many more thoughts but this post is already longer than usual.  We will have more to say in our next newsletter and, hopefully, a little more information to sift through.

BAM MARKET WRAP -THIS TIME IT'S DIFFERENT - OR IS IT?

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CHOPPINESS

After several days of market weakness, the bulls were inspired by overnight comments by European Central Bank President Mario Draghi.  Draghi is the European equivalent to Ben Bernanke and he said that the ECB would do whatever it took to preserve the Euro.  This is much the same language that the Fed has used with regards to propping up the US economy.  The European markets reveled in the comments as most European indices were up 2% or more.  In the US, the markets opened up strongly but have since given back some of the early gains.  We will be very interested to see how the market closes today and whether or not the rally has legs into tomorrow and early next week.  The market was a tad oversold and was due for a rally of some sort. 

The markets remain in the broad trading range bound by S&P 1375 and 1325.  Though it is a 4% gap between these levels, much of the movements in between are mostly noise until either the bulls or bears make a break one way or another.  Caution is still warranted.  The GDP report tomorrow morning could provide fuel for a move either way as well as the continued earnings parade.  Facebook will post earnings after the close today but that will be more interesting than it is market moving.  Earnings have been largely mixed with Apple's recent miss spooking the technology sector.  To this point today, telecoms are a shining star with gains nearing 4% at last check.  Our low volatility portfolios continue to slowly move their way upward largely avoiding the day to day gyrations.  Until we get a break one way or another, it is not a bad place to be.  We will have more thoughts (and maybe a little more clarity) when we send out our newsletter in the next few days. 

CALM BEFORE THE STORM?

Today has mostly been a quiet and very typical summer Monday.  The market has been down from the outset but has tried to get positive all day.  Volume has been very light.  That could all change as we move into the rest of the trading week.   Fed Chairman begins two days of questioning before Congress tomorrow for his semi-annual report.  Traders will be parsing his words carefully to catch any hints of any further monetary easing (QE3).  There are also a number of economic reports and options expiring on Friday (which leads to much heavier volume and volatility).  Companies will also start reporting earnings in droves with many big names reporting this week - Bank of America, Goldman Sachs, Google, Microsoft, Intel, Yahoo, Qualcom and IBM to name just a few.   The S&P (currently at 1352) is bound by 1344 on the downside and 1374 on the upside.  A breakout either way would provide the near term direction of this market.    There will be lots for the market to digest this week so hopefully we will get some clarity.  However, we may be in this range bound market through the summer but time will tell.