The economic calendar is not just full of trivial reports this week. It is peppered with some significant challenges for the market. Monday is the only day that is lacking a potentially market moving event.

On Tuesday the two day FOMC begins so market reporters will be working themselves into a frenzy trying to decide that the Fed will announce on Wednesday. Will they or won't they make any changes and what will those changes be?

Tuesday also has the ISM Chicago, which will basically be an update into the status of auto manufacturing. While the Chicago report is meaningful it is directly impacted by the activity at the automakers and not a general look at manufacturing in the region.

On Wednesday the FOMC decision at 2:15 will be the major event. Personally I think the Fed will wait until September to make any big decisions. The slightly better than expected GDP may have removed any incentive to make a change this week. However, the Fed will have an advance look at Friday's Nonfarm Payroll numbers and of course the early morning release of the ADP Employment report. If the jobs numbers are down significantly that could force the Fed off the sidelines and back into the headlines.

The national Manufacturing ISM is also Wednesday morning and it fell into contraction territory last month at 49.7. If the ISM falls further into contraction that could also stimulate the Fed.

On Thursday the ECB is expected to announce some new policy actions. The most likely will be another LTRO program to loan banks hundreds of billions of euros of cheap 1% money in an effort to force down bond yields for the weaker eurozone countries. Banks can borrow at 1% for three years and then buy shorter term sovereign bonds at 3% to 5% and it provides the banks with a revenue source to offset bad loans and the competition for those bonds drives down the interest rates those countries must pay. It is a win-win for everyone in Europe.

On Friday the Nonfarm Payrolls are expected to show 100,000 new jobs for July. At least that is the official consensus estimate. There are quite a few whisper numbers well below that number. Anything under the 75,000 average for the last three months is going to be a challenge for the market, assuming the Fed did not announce new policy on Wednesday.

The ISM Services on Friday is expected to be flat with June at 52.1. That report is a tossup because nobody knows how the delayed layoffs for retooling by the automakers impacted the service industry.

Event Calendar

Major Indices:

The markets rallied over the last two days as a result of the headlines in Europe. For some unexplained reason the comments from Mario Draghi about the ECB doing whatever is necessary to save the eurozone, caused a massive short squeeze in the USA. Merkel, Hollande and Monti followed up on Friday with similar comments.

These comments are not new. They have all made those same comments for the last two years and while they are soothing to investors afraid the eurozone is going to implode they are meaningless. Of course they are all going to do whatever is necessary. Every announcement by the EU Finance Ministers over the last two years has said the same thing.

The short squeezes just show how oversold and jittery the equity markets are going into August. They are afraid the fiscal cliff and the impending debt ceiling battle are going to push the markets back into sell off mode like we saw last August.

The S&P rallied to a two month high but it still faces stiff resistance in the 1390-1405 range and then again at 1420. If we are going high it is going to take a lot more rumors and public statements with some meat behind them.

Daily chart of the S&P 500 index:

The Nasdaq has underperformed the blue chips and Friday's remarkable +65 point spike was still a lower high on the chart. Unless the Nasdaq can push through 3,000 in the days ahead the tech rally is going to fail. How many more $20 gains in stocks like Amazon and Google are we going to have since all the big caps that matter have already reported?

Daily chart of the NASDAQ Composite index:

I view this week as potentially volatile and even if the ECB and Fed announced some action how do we know that is not already priced into the market?

We are heading into August, the third worst month of the year for the stock market. The U.S. economy appears to be sliding back into recession and the global economy is not far behind. We do have the fiscal cliff and debt ceiling to worry about and just because lawmakers are leaving for a five week vacation in an election year is not a reason to assume there will not be political problems impacting the market.

I suggest patience in initiating new trades. There is always another opportunity in your future as long as you have capital left to invest.

Jim Brown

James is on vacation this week. He will be back next weekend.