The bulls and bears battled all day and the best they could come up with was a draw and support at 10,000 held.

Market Stats Table

It was a busy day economically and the conflicting data caused some mild volatility in the markets. There was a large dip at the open with a return to positive territory intraday but worries came back to haunt the bulls at 2:PM after the FOMC minutes were released.

The FOMC minutes showed an extreme amount of debate inside the Fed on the state of the economy and the direction the Fed should take in continuing its easy money policy. The FOMC said their outlook for economic growth had declined but they still believe we are in growth mode although many members felt the numbers were unclear. They do believe there will be a moderate strengthening in 2011.

The committee noted there had been additional weakness in recent months but said financial conditions for small businesses had also eased and that would be conducive to growth. The expansion in 2011 is expected to be moderate and that should keep inflation expectations low for an extended period of time.

The volatility around the end of the homebuilder tax credit confused the economic picture and the committee members want to see several more months of data before taking any additional steps. In other words they expect conditions to level out once that volatility is behind us.

Continued weakness in employment was a growing concern. Most members felt lack of demand was the essential problem rather than supply side factors. This suggests the Fed's monetary policy will remain loose for the foreseeable future. Several members expressed concerns over weaker growth and the impact of future adverse shocks.

No FOMC members saw an increased risk of deflation but there were plenty of concerns about disinflation. Deflation is a lowering of prices over time while disinflation is a slower than normal increase in inflation. If inflation in 2009 had been 2.5% then a decline to 1.5% rise in 2010 would be called disinflation.

The FOMC agreed to buy more mortgage backed securities as current securities they own expire. This is expected to amount to $400 billion in 2011. Most of the committee believed the failure to keep the balance sheet at the current level would be an inappropriate tightening of policy. A few members believed buying new MBS to replace those expiring would signal plans for more quantitive easing and send the wrong signals to the markets. One member said reinvesting the roll off would complicate the eventual exit strategy. A few members see the Fed's continued easy money policy as increasing inflation risk.

Several members felt the Fed should consider additional stimulus if the economy weakens further but there was dissention by other members. The Fed is definitely conflicted and there were objections to nearly every policy statement in the minutes. Unfortunately the minutes do not show who objected to what. That data by name is withheld for five years in order to avoid political pressure against those who hold a contrary viewpoint. The FOMC wants members to be able to voice their opinions clearly and not be worried about the repercussions.

The market did not like the points in the minutes about the weaker outlook and the robust dissention between committee members. The market would like the FOMC to be of one voice and that voice to be economically upbeat. The Dow lost -90 points after the minutes were released.

Other economic reports included the ISM-Chicago or PMI report for August. The headline number declined -5.6 points to 56.7 for and the lowest level since November 2009. It was also the biggest monthly decline since October 2008. As you can see in the chart the roll over looks ominous. New orders took the biggest tumble to 55.0 from 64.6.

Any number over 50 is still in expansion territory but another decline like August's would put it right at the point where it is back in contraction territory. Backlogs fell only slightly by -1 to 56.2 and the employment component also fell by 1 point to 55.5. Conditions have weakened but they are far from a disaster. The biggest problem is the trend with the nine-month low for the headline number.

The decline was attributed to the fading support from inventory restocking and a downshift in capital spending. New orders have fallen three of the last four months.

The decline in the Chicago ISM suggests there will be a larger than expected decline in the national ISM when it is released on Wednesday.

Chicago ISM Chart

The New York ISM Index came in at 466.5 and a very slight gain over July's 463.6 reading. While the business conditions are still improving in New York the angle of ascent is slowing. The six-month outlook component fell to 58.4 from 69.6 and the lowest reading in 14 months. The current conditions component fell to 55.6 and the lowest reading since August 2009. The employment component slid to an even 50.0 from its highs of 64.3 in June.

The Consumer Confidence for August rebounded slightly from 51.0 to 53.5 but there was no reason to don the party hats and pop the champagne corks. The present conditions component continued to decline to 24.9 from 26.4. However, the expectations component rose +5 points to 72.5 indicating consumers are expecting positive changes after the elections. Their positive expectations did not carry over into their buying plans with those looking to buy a home appliance falling 3 points to 25.1%. This was not a market moving report and analysts believe it will show a sharp decline next month.

Consumer Confidence

Consumer confidence should improve if talk of a new homebuyer tax credit program comes to fruition. With home sales plunging to multi decade lows the White House is mulling another homebuyer tax credit program. Administration officials are downplaying the potential but they are not denying there is a possibility. After all it is an election year and the party in power is in trouble at the polls. What better program could they implement in a short period of time that could garner them more votes? Consumers liked the tax credit programs but they would like a relaxation of the credit standards even more. Plenty of people would like to buy a home but can't qualify under the new rules. Changing the credit rules would be much more beneficial than another tax credit.

Economic reports due out on Wednesday include the Mortgage applications, Challenger Report, ADP Payroll Report, Construction Spending and the national ISM Manufacturing report.

On the stock front Apple (AAPL) is set to unveil a new version of Apple TV with a set top box that will stream movies from Netflix assuming you have a Netflix subscription. The new box will reportedly be priced at $99. The Apple launch event will be in San Francisco and include new iPods, a revamped version of iTunes and no telling what else they have up their sleeve. Apple shares typically decline in the days that follow a new product announcement.

JP Morgan (JPM) is rumored to be shutting down its proprietary trading desk and eliminating 80 jobs in order to comply with the new restrictions on investment banks. The new regulations limit trading by banks for their own accounts rather than on behalf of clients. JPM shares barely budged on the news.

It was a bad month for stocks and especially bad for chip stocks. Sandisk (SNDK) lost 24%, AMD -25%, BRCM -17% and Intel -14%. The semiconductor Index fell -12% for the month and ended August at a 9-month low. Chip stocks lead the Nasdaq so you can guess what kind of month the Nasdaq had.

Semiconductor Chart

The FDIC chairwoman Shelia Bair was out cheerleading for banks today saying bank profits were the highest since 2007-Q3 before the subprime mess started. Net income for banks in Q2 totaled $21.6 billion. However, there are still problems in the sector. The problem bank list as of the end of Q2 rose to 829 from 773. There were 45 bank failures in Q2 and 118 year to date. Bank analyst Richard Bove was quick to point out that much of the profits were from a decline in reserves rather than profits from loans.

When banks have problem loans they have to put more money into reserves and that reduces profits. When those loans are handled and come out of delinquency status the banks can cut their reserves and that money comes back in as profits. Making profits because your bad loans are getting better is a step in the right direction but far from a booming business. The banking sector was hammered in August with a -12% loss. Many of the major banks were trading at 52-week lows.

If you live on the east coast you better get out the plywood and nails because Hurricane Earl is heading your way. Earl is currently a category four hurricane with 135 mph winds and it could make landfall anywhere from North Carolina to New York or just blow up the coast and dump waves, wind and rain on everybody. Following closely behind Earl is Fiona with another storm forming behind her. With the sudden flurry of storms it will be a miracle if one of them does not come ashore and cause some serious trouble. Storm preparation should produce an increase in sales at stores like Home Depot all along the east coast. That is not the way the Fed would have wished for an increase in economic activity. Last weekend was the five-year anniversary of Hurricane Katrina.

For stocks this was the worst August since 2001. The economic downturn punished stocks despite a relatively strong Q2 earnings cycle. The doubts about the faltering recovery kept investors moving money to bonds and out of stocks. August was bad but September is normally worse. September is the worst month of the year historically. It is the only month of the year that has an all time average that is negative. If you look at the last 60 years the average loss for September is -1.2%. That may not seem like much but there are some killer losses buried in that average. Since Y2K the S&P has lost an average of -2.36% in September.

September and October are the months portfolio managers move money around to allocate gains and losses for the current year and setup portfolios for the normal Q4 rally and the coming year. Basically they dump losers and take profits in winners to offset those losses. The keyword in both those cases is "sell."

Because the markets have been so volatile since the 11,258 high on April 26th I would doubt that fund managers have much left that they need to dump but they could have some recent losers left after the August decline. Even in years with big declines the Sept/Oct period can still provide some serious volatility. The period between Labor Day and Halloween is historically the worst weeks of the year for stocks. However, October is known as the bear killer month because many bear markets have seen their lows in October and were followed by rallies.

The Dow lost -4.3% in August and closed near the low for the month. This was the worst month since the Dow lost -5.4% in August 2001. The S&P-500 lost -4.7% and also the worst August since 2001. The Nasdaq lost -6.2% and the worst since August 2001 when it lost -10.9%.

August Losses

The debate over the market direction for September is in full swing. In reality we are better off now than we were in March and yet the doomies are predicting the Great Depression II. Rick Bensignor, chief market strategist for Execution Noble, claims September is going to be a pivotal month for the markets. No disagreement there! He believes we could lose another 2% over the next couple weeks and then rebound from there OR support will fail and we could lose 100-150 S&P points by October. He said, "We are only one headline away from a catastrophic breakdown." That is a heck of a forecast. We could lose 2% or 15% before we rebound. So how do you plan for that Rick? With predictions like that it is no wonder traders are pulling cash out of the market.

David Darst, chief market strategist at Morgan Stanley, pointed out that Argentina, Greece and Spain failed to bring about the end of the investing world as we know it and they are now pretty much ignored. The rest of Europe is in a severe austerity mode and will be flat to down economically for months to come but they are handling their problems successfully. The worst appears to be over as far as news from Europe. With the bad global news already priced into the market he believes stocks are undervalued but he is also wary of September for the normal portfolio restructuring reasons.

Fund managers were able to close the indexes over strong support for month end. The Dow spiked at the close to 10,014 and the Nasdaq to just over 2,100. The S&P made a credible attempt at 1050 but missed it by a point. Whether the closing spike was an effort to close the month for statement purposes or just an errant buy program to cover shorts will be forever unknown but the fact remains support held for one more day. Volumes this August were 30% below the volume average for August 2009. Monday's volume was the lowest volume day of the year at 5.5 billion shares.

For Wednesday the national ISM is going to be the focus along with the ADP Payroll report and the estimate for jobs lost in August. The ADP estimate will be the last chance for analysts to revise their forecasts for the Non-Farm Payroll report on Friday. This is a busy week for economics so the bulls have an obstacle course to traverse before Friday's close.

The S&P has tested critical support at 1040 three times since August 24th. That support dates back to February. So far that support has held and the next critical level is the 38% Fib retracement at 1014. The S&P is in trouble because of the weakness in banks. With the financial sector in dive mode it will be tough for the S&P to produce any bullish momentum. Resistance is still 1060-1065 and that has been a solid ceiling.

S&P-500 Chart

The Dow clung to support at 10K for the last six days but the outlook is grim. The declining economics are poison to the Dow stocks and the odds are very good we will see that support fail. The Dow will likely target the lows at 9600 we saw back in July. Resistance is 10100-10150 and 9950 the next level of support. The Dow 10K level is psychological rather than technical.

Dow Chart

The Nasdaq shook off sellers multiple times over the last week but closed very near support at 2100. Pressuring the Nasdaq was the decline in chip stocks. That pressure continued on Tuesday after Gartner cut their PC sales forecasts once again. Gartner now expects worldwide PC shipments to rise +15.3% in the last six months of 2010 and about 2% lower than their last prediction. That number was near 20% a couple months ago. Gartner said iPad sales were impacting sales of full size PCs and laptops. The mini notebooks or netbooks comprised only 18% of shipments in Q2 and that number is expected to fall to only 10% or less by 2014. With low demand forcing low-end laptop prices to less than $500 this impacts the dollar sales volume of total computer sales. Basically companies are selling more computers but receiving less money for those sales.

The Nasdaq is paying the price for the lowered sales forecasts and the various downgrades to chip stocks. Nasdaq big caps like RIMM (-2.75) and GOOG (-2.67) are also making it very tough for tech investors to swim upstream. Support is 2100 followed by 2063 and resistance is solid at 2150.

Nasdaq Chart

In summary fund managers were able to close the markets over support for month end but Wednesday begins a new month. I would be very surprised if we did not see lower lows in September. The Friday short squeeze was completely erased on Monday without even breaking a sweat. Volume was the lowest day of the year. Once these major support levels begin to crack that volume will increase as stop losses are hit. I am looking for a rough September and a buying opportunity in early October.

Jim Brown