Negative Expectations for September

Good morning. It's hump day and futures are mixed. Durable goods orders for July came in better than expected and the prior reading was also revised upwards. Like yesterday, the earnings calendar will remain quite slow.

The good news is that despite last week's rally, sentiment continues to become more bearish. The weekly investor's intelligence report showed another fall in bulls from 43.6% to 39.6% and a rise in bears from 28.7% to 30.2%. These are levels that are considered bullish for investors. Given the high amount of puts being placed in the market right now, the short sellers are providing fuel for a major market advance.

From the chatter I hear, the herd on Wall Street is now betting aggressively that September is going to be a bad month for the market. According to Stock Trader's Almanac, there is reason to believe that since September usually is the worst in terms of historical performance. However, that being said, I have to say that I'm left with the opposite feeling I had at the middle of June when nearly everyone thought the June 30th deadline would ignite a major summer market rally. July turned out to be the worst month for the market this year. Will September be one of the best months in 2004? It very well could be.

Yesterday, I wrote that one big positive ahead is the Republican Convention. Another possible catalyst is the continuation of the falling price of oil. This morning the Wall Street Journal reports that there is a plan to release oil from strategic reserves in order to relieve some of the recent upward price pressure right in time for the election. I've always said that I don't believe oil will be very high during election time for obvious reasons. The market, however, doesn't necessarily agree with that view. At least not yet anyway.

If the government can move oil prices substantially lower in the short-term, it will disappoint those who are shorting the market at this juncture. Just imagine this - if oil prices fall dramatically (and I know that is a big if), Greenspan & Co. can still tout their "soft-patch" argument and the folks who still believe the only reason why the economy is weak now is because of higher oil prices (I actually think there are other reasons, but that's an entirely different matter) will be emboldened even more. This is especially true if we get a few stronger than expected economic reports, which are bound to happen in the critical election time season. For example, I suspect a stronger jobs report early next month could ignite a major short cover rally.

In the short-term, one of the roadblocks in our way is that we're now in overbought territory again as you can see below:

On a short-term basis, being overbought means you want to be a little more careful about your entry points and less greedy with your exits. We can still rally in an overbought condition, but the wind is against us. Some end of the month portfolio dressing should be expected and at this point it matters more how much the short sellers are leaning against the market and individual stocks and how much conviction they are willing to have with their positions. Short sellers can provide the fuel for a more sustained advance if the headlines force them to cover. Is that possible? Given the way the market is leaning right now, I think so. Or, to put it another way, the risk/reward favors those who are long the market at this point on intermediate term basis (two to four weeks). The most bullish thing the market can do is to consolidate its gains here and allow the shorts to rebuild significant positions ahead of some unexpected strong economic headlines next month. Let's see if that happens.

Have a profitable day!