Doug Kass: 'Toxic Combination' Threatens Sept. S&P Gains

As bullish as the momentum may seem in stocks right now, chatter is growing that it could all come to a screeching halt on Friday October 1st once the month and the quarter close.

Strategic investor Doug Kass of Seabreeze is among those investors who thinks we're about to hit a wall.

He tells the Fast Money desk he “growing more fearful (of the rally) on both technical and fundamental grounds."

Of course a pullback wouldn't surprise anyone. The Dow is up over 8% on the month while the S&P is poised to end the month about 9% higher.

But Kass suggests the market is looking at more than a pullback.

”The market is delivering a potentially toxic combination of low volume, poor breadth and weakening financial stocks. These are classical bearish signals.”

To make matters all the more precarious he believes the September rally is predicated on faulty fundamentals – specifically, confidence that the Federal Reserve will take extraordinary steps to spur economic activity.

Kass doesn't think QE2 will be all that big or all that powerful. ”In the last 24 hours we’re hearing from 3 Fed Reserve presidents that the Fed is hesitant to come into the market guns a blazing.”

To make matters that much worse, Kass suggests current gains are strictly due to momentum - just "a combination of algorithms and technical price momentum based strategies."

And long term, he thinks a weaker dollar is potentially catastrophic for the equity market. Though he concedes that in the short term "the weaker dollar improves our export base," in the long term he says "it encourages uneconomic economic activity such as government deficit spending. Then we get asset price inflation which is unsupported by cash flows. And we get huge inflation in commodities."

And all of that adds up to a toxic combination.

We know that Kass is renown as a bear so the negative commentary isn’t that surprising.

But Kass has an uncanny knack for reading the market. Less than a week before the S&P 500 hit a generational low of 676 on March 9, 2009, Kass went on CNBC and predicted the bottom. On July 6, 2010, he said the market had made its lows for the year and so far, that has also proved to be true.

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Trader disclosure: On Sept. 29, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Terranova Owns (APA), (AAPL), (ARUN), (BMO), (C), (IBM), (HES), (JOYG), (XBI), (FTO), (OXY), (ORCL), (PEP), (POT), (RSH), (SU), (RIG), (UPL), (VRTS); Adami owns (AGU), (BTU), (NUE), (C), (GS), (INTC), (MSFT); Adami’s wife works at Merck; Grasso owns (ASTM), (BA), (BAC), (C), (CSCO), (JPM), (LPX), (MO), (MOT), (NDAQ), (PFE), (PRST)

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