Last week lived up to expectations giving us the second lightest volume of the entire year, and a grand total of sixteen positive points on the Dow. With most of the trading world back at work, and a quadruple witching closing out the week ahead, the long slow summer will finally be behind us, and I expect it to go out with a bang. We have a veritable smorgasbord of economic data for returning volume to feast on, which may be what prevents a major move downward, since it is only reasonable to assume there will be enough conflicting reports to keep the market guessing. Of course, this means we should see a fair share of choppy trading. In fact, I will be shocked if we don't see at least one daily or day to day swing of around two hundred points on the Dow.
The Basel III agreement over the weekend is giving banks more time to meet capital requirements, which has futures sky rocketing. Call me crazy but this sounds like a fire chief telling the mayor of a burning city that he can take his time getting water. However, the market seems to think the more lenient time frames and requirements are good for banking stocks, and thus a bank rally is induced. The first two weeks of September have erased the losses taken over the entire month of August, and no one else seems to think this is dangerous. It is. History tells us that, like a plane, it takes much longer to climb up to altitude than it does to crash back to earth. A steep rise, in a short amount of time, on frighteningly low volume, screams to me that the market will come back down very quickly. Monday may simply be climbing the last few rungs of the ladder before jumping off.
Tuesday brings tidings of retail sales for August, and business inventories for July, which should give us a pretty good idea of what business inventories for August will look like. The market is expecting a smaller increase in sales than we got in July, and a larger increase in inventories. I don't like that combination. If inventories are rising and sales are dropping, that doesn't say to me, "business is good." What I hear is, "my business has nowhere to go with this stuff," and that doesn't give me confidence in the economic outlook. However, the market will probably look at rising inventories as a sign businesses are stocking up for impending sales, and will rise if the numbers come in above the .8% increase expected.
On Wednesday we get bombarded with manufacturing data. Beginning with the Empire State Manufacturing survey, and ending with industrial production and capacity utilization. By 9:15 the market will have its snapshot of what the country is producing. The New York manufacturing survey will more than likely come in lower than last month, but forecasts have set the bar low enough to not rattle the market. Industrial production is also expected to have slowed, and capacity utilization is expected to come in well under the threshold that signals inflation is becoming a problem. (That last part hurt to write. Of course we aren't worrying about inflation right now) All in all, a good set of data on Wednesday will give the market plenty of fodder to run higher.
Thursday is going to be a very interesting day. The most important releases come from the Philadelphia Fed, which stunned the market with a far more negative reading than expected last month; the Producer Price Index, which will give us very little information on whether or not deflation is gaining traction; and my personal favorite, the initial jobless claims for the week. The Philly Fed's number last month was so bad that I can't see any way for the number to get worse (famous last words). PPI is expected to have declined slightly, but given the slight increase we got last month, no one is going to jump to the conclusion that deflation is a problem. As if interest rates of zero and the printing press running 24 hours a day aren't big enough clues. The jobless numbers make my head throb. Last weeks shocking "beat" was accompanied by news that due to the Labor Day holiday, the government "estimated" the numbers for nine states, including California (only the WORLD'S FOURTH LARGEST ECONOMY). So I am pretty anxious to see what the revised numbers for last week are, and I will be utterly blown away if this week's numbers come anywhere close to the estimates of 440K economists have given. Secretly I'm just waiting to see if Rick Santelli's head explodes on live TV when the report comes out.
We close out the week with CPI and the Michigan sentiment numbers. I don't trust the Michigan sentiment numbers, and certainly don't trust the estimates that say it went up last month. Maybe with the world on vacation in August people drank their two pina coladas and truly left their worries behind, and that just might be enough to raise their "sentiment." But reality, and school, and bills, and no new jobs are waiting for them this week, and those things scare me.
Overall, I am keeping a keen eye on volume this week. For all the talk of how the flash crash has scared half the market away for good, volume this week becomes a major headline to me. If the volume returns, like I believe it will, then the market is in for a very bumpy ride. Some of the data that comes out will be good, and some of it will be really bad. Considering the fact that the market is near, or at, the top of the range I am expecting us to see a fair drop by the end of the week. Of course that is assuming we don't break through resistance around 10,700 on the Dow. My prediction for the week is a loss of 2-300 points, but that is laced with hope, as I still fear a much steeper decline in the near future. If we break through 10,700 with any real volume though, we could end up around 11,000 by Friday, but I still say we go the other way.
