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Market Concerns For The Coming Months

Stocks - Bonds - VIX - Seasonality $INDU $VIX $TNX

As we enter September, the worst month for stocks, we want to take a look at the state of equity markets. This will be a longer term, big picture view of where we have been and where we may be heading. Buckle up, there may be a lot more volatility ahead!

Coming into September, the Dow Jones Industrial Average has already suffered a decline of 5.73% in the month of August. With a laundry list of concerns looming overhead such as; war in Syria, emerging market crisis, debt ceiling reemergence, fed tapering and the replacement of Ben Bernanke, we may see elevated volatility in the coming months. More on these specific concerns here.

The Dow Jones Industrial Average is also at a very interesting inflection point on the charts. The chart below defines the broad range that the Dow has been trading in since the mid 1990's. Presently, we are testing trend line resistance around the 15500 region. From this longer term perspective, it appears that a big move in the stock prices may be just around the corner. In the case markets continue to selloff a pullback to the 13500 to 14000 region would still leave the bull market intact. This area happens to be the highs from 2007 as well as trend line support that has characterized the bull market since it began in 2009. Interestingly, the start to the peak of each of the 3 bull markets below has taken a similar amount of time. The Dot Com bull was 59 months. The Subprime bull was 60 months. And the QE bull is now at 53 months. Big trouble on the way in 2014?

In addition to the precarious nature of the chart technicals, the CBOE Volatility Index (VIX) or, "Fear Gauge", indicates market participants have become broadly complacent about downside risks in the marketplace. Historically, the VIX trading between 12-17 has been indicative of this complacency. This may be a great example where buying insurance when it is cheap is better then buying it when you absolutely need it.

Another potential headwind for equity markets are rising yields on the benchmark 10-Year Treasury Note. There has been a bull market in bonds and bear market for yields for over 30 years! If yields rise beyond 3% on the ten year market participants may get uneasy. Rising rates would hamper the housing market recovery while negatively impacting real estate developers and mortgage lenders. It will be an important tell how the stock market reacts when the 10-Year yield rises above 3%.

There are number of downside catalyst emerging and the market has not yet fully priced in these concerns. If the stock markets can work through these issues and make new 52 week highs the bull market may really start to run away. In either case, caution is warranted moving forward through September and increased volatility should not come as a surprise. Keep an eye out for a major shift in the macro environment.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.