Calm before the storm - or not, is the question. War or peace. Ceasefire or not, weaker Retail Sales or not. A motivated Fed in late summer, or not.

depositphotos

Accelerated anxiety? For sure, but you can't really feel tension on the tape as it remains a bifurcated market, with the small-cap rotation actually hanging-in.

This is actually a dangerous economic week, and not as one might think. In fact, if the economy is stronger, that deters the broad expectation of a rate cut in September. You don't have a workforce slippage in prime working years as isn't generally emphasized. So perversely, the odds of an S&P (SPX) breakdown are enhanced, if the economy looks good, consumers stronger than many think (I think it's bifurcated in that regard took), but a wider war is also avoided. There is not expected universal capitulation, just concern that good news is bad news is a possibility, and basically shaky continued short-term vulnerability persisting.

Despite the fear and handwringing about AI, or the semiconductor prospects, or for that matter whether Iran and/or Hezbollah attacks Israel tonight, or Putin is motivated to do something else, other than constantly threaten and attack (in his hypocritical nature continued his moaning about 'Ukraine invading Russia', one of the greater ironies I've heard in a year as Putin is the aggressor and has no concept of retreating from territories he illegally occupied to start all this)...in any event it's August, everyone seems prepared for further decline, and we also know that some of these issues are not just 'crying wolf' but actual risks.

At the same time, sort of like you 'might' be seeing in SoundHound (SOUN) or even in BigBear.ai (BBAI), there's an evident accumulation on dips that is not unusual during weak seasonal times. Remember there's typically little fresh cash coming into markets in August / September, but some of the best buys are made during a time that markets (and investment managers) are generally frustrated, or they understand the risks as well as seasonality and already prepared for jitters.

The point is that the geopolitical jitters create fresh opportunities for those with patience, buying power they're willing to commit in heavy times. Of course, again especially those who built cash in June/July anticipate big caps to falter, during the time we enthusiastically avoided chasing mega-cap techs.

We don't know that periods of volatility are over, even though we don't anticipate a replication of the accelerated S&P downside that accompanied algo-drive or 'Carry Trade' liquidations, which happened to 'meld together' after the Bank of Japan hiked rates. Sure, if you get a major Mideast calamity war, stocks will get hit again for sure, and drive more into (if not below) the S&P 4,900-5,100 zone I measured as the post 5,400-breakdown expectation. Nothing is precise, and for sure the odds for the Index favor heaviness and erratic behavior for a while.

Market X-ray: 

Sentiment recognized an AI bubble a month ago in a strong phase we had looked for in July's first half, and then weakness in the second half and continuing rocky into August or even September.

It's also, fairly seasonally typical as a time for concern. It's exacerbated or lots more confusing to most investors this year, given the domestic bifurcation in politics, worldviews, economic consumption, and even the markets directly. It is thus a time that's not appropriate to toss all stocks into the same basket.

So, we give respect to 'Dog Days of Summer', with an open mind to seeing an exception or two, which if it materializes would likely depend on individual news or reaction in the market. It's a strange world when Saudi Arabia talks of security pacts with Israel, and it seems could care less about the Palestinians. 

 Keep in mind Iran is also vulnerable to its oil supplies becoming a target, and they are even more reliant on oil income than Riyadh is. Wonder why you don't hear much from China about all this? I suspect that's why...they absolutely require energy from both countries, and oddly less so from Russia.

By the way, both Russia and Ukraine have stated they will not interrupt gas transmission to the EU despite the fighting around the gas and nuclear plants.

Meanwhile . . . there's little hard news to sink our teeth into about stocks.  

SoundHound has acted well, and quite candidly if it can consolidate primarily above 5, rather than below it, that will elicit more interest and help it gradually move perhaps to 7 or 8, but if it does that, I'd be thinking a short-squeeze (too many bearish hedge fund guys playing for failure) lofting it even higher. Long term it either gets acquired by a major mega-tech or succeeds on its own in all likelihood. The primary reason I speculate may be a takeover, stems from a twenty year period during which, the (mostly Stanford) guys at SOUN worked on this and often raided the till to get by, and I think that level of scrappy finances has finally gone by the wayside (hopefully). So, I view it as a slightly nervous hold.

Then there's BigBear.ai which I've sort of thought insanely cheap. If they are able to execute just any of several major areas they're working in (airports of course the most visible, but also seaports, hospitals, stadiums, and all kinds of security screening), plus warehouse management (Amazon?) and DoD. It's the DoD work likely getting focus this month, given some demonstrations. As usual we hear nothing about it but given that the President of BigBear (that's Kevin not Mandy) is a full AE Industrial partner, we simply suspect AE Industrial Partners plans a growth phase for BBAI, and perhaps the very high volume today takes note. Big boring disappointment so far, but possibly has lots of leverage potential, as well as seriously funded people behind them, namely the AE team.

Bottom-line: 

It's not a lack of liquidity on a daily basis, but that lack becomes visible 'if' you get market craters, such as historically can and have happened in August/September timeframes more than other times. Add the two wars in the world just now, plus excess valuation in mega stocks combined with lower valuations in small stocks, and you see the calm before potential storm.

The odds of an updraft instead of a downdraft may be legitimately lower, as most big investors have or are (belatedly) lowering their exposure. Discretion remains the better part of valor, even as an intraweek rally might be on the agenda, but fighting the headwinds of potential imminent combat is difficult.

More By This Author: