08/30/10 - 09/03/10

   The past week gave us the predictably bad news everyone BUT the "Economists Surveyed" expected, and this no volume August market reacted in what has become its predictable fashion, which is to say, stupidly.  Existing home sales were so far outside the realm of the forecasts given that the briefing forecasters should have jumped out of a very high window, and the market only lost 1.2%.  Durable goods orders missed by 2.9% on the down side, and the market was FLAT.  Initial claims came in at consensus, and the market started to take a hint, though only to the tune of 1%.  Then, for the grand finale, GDP was revised downward by .8%, which was better than expected, and the market Rallied a full 1.7%.  The easy argument is to say that the market had already priced in a majority of this news, and with word from the fed that they will do "whatever is necessary" to prevent a double dip, including "conventional and unconventional" methods, the only possible reaction for the market was a rally.  Hopefully I am not the only person that gets nervous when I hear Bernanke say he will use "unconventional" tools to stem this crisis.  Hopefully I am not the only one who thinks this sounds a lot like a guy trying to rob a bank with his finger pointing in his coat pocket hoping everyone will believe it's a gun.
   Let's look at quarterly GDP growth over the last 4 years:






   Does this look like GDP is leveling out or bottoming?  Has unemployment suddenly dropped back to 5% so that we can actually start producing again?  The fact of the matter is that until the jobs picture drastically improves, GDP will continue to get worse, and the market has NOT priced in what will inevitably be the dreaded Double Dip (although, I personally hate the term "Double Dip," because it presumes that we actually made a full recovery, which is debatable).  But this is a long term problem, and only has a minor impact on what will be happening over the next five days.
   We have a bevy of data coming out this week, which means we will probably get a little gridlock from conflicting reports.  I actually expect decent numbers on Monday with regards to personal income for July, but personal spending could disappoint as people continue to pay down debt.  Neither of these should be market moving numbers though, and I expect to see a flat to slightly up day to start the week.  Consumer confidence for August is the number I'm most interested in on Tuesday.  If we see a number below 48, look out.  Chicago PMI will likely miss on the downside, but is doubtful to be below 50, which would signal a contracting manufacturing sector, and therefore won't garner too much knee jerk reaction.
   On Wednesday we get Construction Spending, Auto and Truck sales, and none of these really matter beyond giving the talking heads something to talk about in the middle of the week.  The meat and potatoes for the week get plated on Thursday and Friday.  Thursday we get weekly job numbers followed by Q2 productivity, and July Factory orders.  Usually these wouldn't be significant reports, but given the GDP revision we saw last week, I am expecting to see much worse numbers than are expected.  The market will be a little tense as it waits for the final August Unemployment numbers due out Friday, so we may get a flat day regardless of the numbers we see.
   I seriously doubt Friday will be as tame if we see any major surprises in the jobs picture.  We've seen an upward revision every week for the last month in unemployment numbers, and I expect an ugly number, as most of the market certainly does.  If Non farm payrolls come in below July's -131K, it could be a very ugly day indeed.  In the private sector, the market is expecting to have added 10K jobs, which shouldn't be a hard number to meet, and might even get beaten on the upside, but unless it comes in with a huge upside surprise, even a slightly more positive number will be a confirmation of gloomy sentiment that will weigh heavily on the market.
   The rally on Friday crushed an otherwise sound market prediction for the week past, but plays happily into my predictions for this week.  It sets up nicely as a correction in this prevailing downtrend, and I am expecting that trend to continue beginning Tuesday.  We have not found the bottom of the range yet, and with only macro economic news in the spotlight for the week, I believe we will find it.  August and its obnoxiously low volumes will close out with a final sagging, and lead us into September with downward momentum.  I can see a bullish move within the range beginning next week and lasting two to three weeks, but only after we tickle the bottom of this summer range.  9800 here we come, but perhaps not for long.  I expect us to close down 300 or so points for the week come 4 o'clock Friday.