"A trap is only a trap if you don't know about it. If you know about it, it's a challenge."
The beginning of September always feels like the start of a new year, as summer comes to an end and kids return to school. While market players are mentally prepared to return to work, it can be a seasonally tough time for the market. Seasonality is a tendency, not a certainty, but there are plenty of potential catalysts out there that could trip up this market as we start to look ahead to the end of the year.
What has been most notable about the market since July 14 is how remarkably flat the indices have traded. The indices have set some records for lack of movement during that time. We have had two very long trading ranges during that time, with just one decent jump on Aug. 5. Even Janet Yellen's Jackson Hole speech was unable to cause much volatility.
One of the general principles of technical analysis is that long trading ranges are a setup for big moves. All that pent-up emotion eventually emerges and we break out in one direction or other. As things start to move all the folks who have been impatiently waiting for clues as to the overall market direction jump in and help to propel the nascent trend.
When a basing period is extremely long, there often is a tendency for increased volatility as a new trend emerges. The folks that have been waiting for action tend to anticipate false breakouts and, of course, we have the computer programs to deal with these days that can make the moves extremely choppy.
Recently the bears have been growing increasingly confident that conditions are in their favor. There is negative seasonality, a lack of momentum in the indices and a more hawkish Fed. The bears have been anticipating for years that the central bankers were going to trip up this market sooner or later and that is still remains the prime bearish argument.
Interestingly, the poor jobs report on Friday generated a positive response form the market as it may have pushed the Fed back from a September rate hike. Despite the increased hawkish chatter from the Fed, many pundits are convinced that there will be no hike. Others believe the Fed will find a reason for at least a small hike in order to maintain what credibility they have.
We are going to wrestle with Fed expectations again this week, but what is likely to be more important is the European Central Bank meeting on Thursday. It is expected the Mario Draghi will announce an extension of their asset purchase program and the Wall Street Journal speculated over the weekend that they could even extend the program to equities.
That smacks of desperation, but with no signs of inflation and the uncertainties of Brexit sill in the air there is no reason to expect anything but more dovish policies from the ECB.
And in there lies the dilemma for the bears. While technical conditions may seem to favor some downside, we have repeatedly seen the market celebrate central banks. Even when they are well anticipated, there seldom is a "sell the news" reaction.
That is the setup we face this morning. One other challenge is that stock picking, which was quite good for much of August, has slowed down. A number of stocks have become extended and the hot pockets of momentum have narrowed.
Traders haven't worried too much about the flat indices because of the stock picking, but if that continues to cool off the risk of a downside resolution of the trading range increases.
We have flattish action in the early going, with a slight rise in oil helping matters.