Want to know what's going to happen to stocks in September? It's simple.
Tell me: 1) Will the European Central Bank/European Union put out sufficient details on the rescue package; and 2) what will happen to Apple, which is up almost 70 percent this year, including almost 12 percent this month (!!) — it is the number one, two, or three stock of virtually everyone I know.
One thing you can be sure of: September will be more lively than August. The VIX futures curve remains in a steep contango (learn more) — prices farther out are much higher than prices in the closer months — indicating that traders believe this low volatility will not last.
Of the traders I talk to, 90 percent believe there will be at least a 10 percent correction in September or October. That, of course, is a contrarian indicator.
A 10 percent correction in the S&P 500 would bring the market back to the 1,278 level, which was close to the lows for the year.
But a 10 percent correction in Apple — which would bring the stock back where it was, a month ago or so, and drop it below its 50-day moving average ($612) — would be a far more significant event. If that happens, trust me, there would be a lot more hand-wringing, soul searching, and technical rooster crowing than if the S&P 500 corrected.
Oh, and did I mention that 90 percent of the traders I know are underperforming the S&P 500 , which is up 12 percent this year?
"There is something lurking out there ... we cannot continue to have central bank stimulation forever, with more debt layered on more debt," one trader said to me. He, too, is underperforming. "I'm long 20 percent of what I would normally be long in a market like this. I gotta own it because my neighbor owns it, that's a silly investment concept, but it's worked this year," he said.
1) Isaac impact on stocks minimal, for now. There is some concern about flooding, which would increase claims for auto damage and commercial property damage. Note that flooding is excluded from most homeowner policies.
Right now, estimates for insurance losses appear small, with estimates from $600 million to $2 billion. No change in stocks of major insurers like Allstate, Travelers, Chubb, and Hartford. Modest impact on chemicals — some plants may be shut for three or four days, depending on power outages.
2) ECB chief Mario Draghi, in an editorial in Die Welt that is squarely aimed at the German electorate, laid the groundwork for closer financial integration in Europe. He noted that the current regime, where there is a monetary union with no fiscal integration, "left the euro area insufficiently equipped to ensure sound economic policies and effectively manage crises."
Draghi directly addresses the central argument of the anti-euro crowd, that a bunch of bureaucrats in Brussels will control everything: "We do not need a centralization of all economic policies."
What does Europe need to make the euro work? 1) Oversight over national budgets: "We cannot afford a situation where some regions run permanently large deficits vis-à-vis others," Draghi said; and 2) bank oversight — a central bank authority to regulate large banks in the euro zone.
Of course, many will argue that oversight over national budgets, and a supernational banking regulator, are already going a long way toward a centralization of economic policies. Draghi knows that the process of more integration needs buy-in from the voters, or it will blow up at some point. He notes that the EU has already gone a long way toward integration with a European Parliament, but admitted more work needed to be done to "further increase the legitimacy of these bodies."
Finally — and this is the part the traders underlined — Draghi said the ECB would act within its single mandate to ensure price stability, but that "fulfilling our mandate sometimes requires us to go beyond standard monetary policy tools." He went on to talk about the need for "exceptional measures," but didn't outline what those measures were.
—By CNBC’s Bob Pisani
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