September is off to a very strong start with the S&P 500 up more than +6% in the first seven trading days. I pray you realize this pace is unsustainable. The market will see some profit taking but the short-term trend is certainly up. It looks like the rally in bonds may be over, at least temporarily. Traders are taking profits in the bond market and putting the money elsewhere. Some of that money could be fueling current stock gains. I am going to keep this market commentary concise tonight since not much has changed in the last holiday-shortened week.

Daily chart of the 10-year bond yield:

This past week investors were digesting the Federal Reserve's Beige Book report, the weekly initial jobless claims on Thursday, and the Wholesale Inventory data on Friday. The Beige Book was a bit of a letdown. There are 12 Fed regions and five banks said their region saw moderate growth (not getting better) while another five banks said their regions saw a slowdown in growth (decelerating). Only two banks had positive anecdotal evidence their regions were growing. Stocks managed to rally on Wednesday but gains were pretty mild.

Thursday's initial jobless claims were better than expected. Claims fell -21,000 to 451,000. That is certainly improvement and the lowest reading since July 10th but one week doesn't make a trend. Plus that week was just ahead of the Labor Day holiday and people out of work may have been focused on their weekend plans and not filing for unemployment. The four-week moving average remains elevated. Given the sheer size of the U.S. workforce these weekly numbers are mere distractions, until we see a steady trend under 400,000.

The Wholesale Inventory data on Friday was positive. Inventories jumped +1.3%, which was much better than expected. The government revised June's data higher to +0.3%. July sales were positive, an improvement over June. There was a lot of analyst talk about how this build up in inventory was a positive sign of confidence for the future. Personally that sounds like the media is trying to put some positive spin on these numbers. The manufacturing data has been unsteady lately. I would wait for more information before getting too excited here.

In other news it was not a good week for the semiconductor sector. SLAB issued an earnings warning on Wednesday. NSM and TXN guided earnings lower on Thursday. This confirms the recent bearish trend in the semiconductor sector and all the bearish analyst comments on this group. The oversold bounce in the SOX has failed at resistance. Normally the SOX tends to lead the NASDAQ, which isn't a good sign. Currently the SOX index has a bearish trend of lower highs and lower lows.

Daily chart of the SOX semiconductor index:

I would keep an eye on the banking stocks this week. There will be plenty of headlines regarding the Basel III meetings held in Switzerland over the weekend. Many expected regulators to exit the financial summit with a load of new rules and requirements for the already weak European banking sector. While banks will have years to implement these changes they will want to look strong and implement them sooner rather than later.

This week we will see the Retail Sales for August on Tuesday. Economists are expecting retail sales for the U.S. to improve by +0.3%. On Wednesday we'll get the New York Empire State manufacturing survey. Analysts are looking for an improvement from 7.1 to 9.0. Thursday will bring the Philly Fed survey and the market wants to see a bounce from last month's reading at -7.7. On Friday we'll see the latest Consumer Sentiment numbers. That could be interesting since it will reflect attitudes during the stock market sell-off in August.

I would keep an eye on the U.S. dollar. The dollar has been churning sideways for about four weeks and a big move either way will certainly have an impact on stocks.

Daily chart of the UUP (U.S. dollar ETF):

Over the weekend China released some good news with better than expected industrial output. Production rose +13.9% from a year ago, better than the +13.0% estimate. Retail sales soared +18.4%. Consumer prices rose +3.5%, the biggest gain in almost two years thanks to sharply rising food prices. Analysts are expecting China to see +9.4% GDP growth in the third quarter and +9.0% growth in Q4 2010. If the world's third largest economy can engineer a soft landing then it should spell good news for the rest of the globe. This data could spark gains for resource names on Monday. Keep an eye on the FXI Chinese ETF. The FXI is consolidating sideways and looks ready for a breaking in the next few weeks.

Daily chart of the FXI (Chinese ETF):

Overall not much has changed from last week. Investors are still cautious over the fragile U.S. economy. Perceived weakness in Europe could cause things to roll over. Meanwhile the strength in China could produce the opposite move and inspire more buying pressure. I remain hesitant to launch new positions with volumes so low in the market. Many are expecting volumes to pick up this week with the first full week of fall for Wall Street. Stocks will remain volatile ahead of the election but I am expecting a fourth quarter rally. The challenge will be choosing our entry point.

- James