It's a two percent week. Everything is up about two percent this week:
Pretty good, eh? To top it off, we are one percent from a historic high on the S&P 500.
And yet...I'm concerned.
The market is fat, bored, and complacent.
Everyone seems to have assumed that Syria has gone away, that Chinese economic data will continue to improve, and that the U.S. 10-year Treasury yield will stay in the high-two percent to low-three percent range.
None of these assumptions are certain.
More importantly, there are at least four events in the next few weeks that could rattle the markets.
First: Fed tapering. The Street has convinced themselves that there will either be no tapering or "taper light," i.e. a cut of only $10 billion in Treasury purchases, and little or none in mortgage backed securities. Nice, but if we get a cut of $20 billion, that is NOT priced into the market.
Second: a continuing spending resolution. We have less than three weeks to produce a continuing spending resolution to prevent a government shutdown on October 1. House Republicans want restrictions on Obamacare as part of any deal,so this is a mess that could easily blow up soon.
Third: a debt ceiling hike. House Republicans have not even articulated what they want as part of this deal.
Fourth: German elections on September 22. Merkel is having a tougher time than anticipated, but even if she wins it is very clear that the German electorate does not want endless bailouts, of Greece or anyone else. Polls indicate the electorate wants to keep the European Union but would like it to be smaller. Many traders are expecting a quiet move to ease Greece out of the EU in the coming year. This is also not priced into the market.
Despite these concerns, the CBOE Volatility Index, at 14 and change, remains near its lows for the year.
S&P near historic highs, VIX near lows, lots of potential macro events that could rattle the markets in the next few weeks. Sounds like risk is to the downside to me.