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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?

    (click to enlarge)

    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.

    (click to enlarge)

    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%.

    (click to enlarge)

    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.

    Sep 03 1:43 PM | Link | Comment!
  • What To Watch For In September

    US stocks finished the month down over 3%, making August the worst month in over a year. The last month that was this bad was May of 2012. Though it is important for traders to keep in mind that the August sell-off comes on the heels of an extremely positive start to the year.

    That being said, some investors are worried that September may be a turbulent month because there are a number of major problems lurking, stocks have a lot of gains going into the fall and September has traditionally been a rough month for stocks.

    Syrian War

    There are a number of issues that investors should keep an eye on as we approach the fall. First, there has been a tremendous amount of speculation that the United States may get involved in a military action against Syria, after there was an attack with chemical weapons, which is being blamed on the Regime of President Assad. If the US does go to war, there could be some major geo-political implications that could affect the balance of power in the Middle East, the price of oil or some other unforeseen consequence may emerge.

    Emerging Markets Crisis

    The second factor to keep an eye on is the implosion in the emerging markets. This is perhaps the most serious development (with the exception of Syria arguably) on this list. India has fallen into an economic tailspin as their currency has dropped to record levels and the country faces its worst financial and economic crisis since 1991. A number of other emerging markets are in trouble, including Turkey and Malaysia. If a broader economic crisis infects the recovery in the West or there are unpredictable ripple effects in the financial markets, US stocks may be in for some trouble. The slow-down in China may also exasperate these problems as well.

    German Elections

    A less volatile, but none-the-less important development to watch is the German national election on September 22nd. According to polls, Angela Merkel looks poised to win the election handedly as we approach the final weeks of the campaign. Everyone (including the markets) expects Merkel to win, so if there is an upset, or a last minute change in the polls, there could be some turbulence coming out of Europe once again.

    Fed Tightening, and Bernanke's replacement

    The final factor I will be watching is the rhetoric coming out of the Federal Reserve, and the drama involving the replacement of Ben Bernanke. If the Federal reserve begins to taper their easy monetary policies, there may be a major re-balancing of risk. In fact, the problems in the emerging markets are seen by some analysts as the direct result of investors and banks pulling out of risky foreign assets in anticipation of tightening by the Federal Reserve (or at least a minor retreat from the easy money policies of the past few years).

    Regardless, US stocks have still posted solid gains for the year, and there may be some investors and asset managers who feel that it may be time to take some profits to lock in those gains. So investors should be alert as we move into the fall.

    Sep 01 7:23 PM | Link | Comment!
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