The market’s summer fling with record highs is about to end

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Investors have had a terrific summer fling with stocks, and, just like those youthful, seasonal dalliances, it is set to end, as fall arrives and some realities set in.

Not to say that the summer fling was not worth it: the rally off of the June 23 Brexit vote, correction has been impressive, with the S&P 500 rallying ten percent, in ten weeks' time and rallying over 20 percent, since the low in February, which represented the second test of 1800, to the downside. The first such test occurred in January.

The subsequent bounce higher installed a prominent double-bottom on the chart, giving technical traders a strong buy signal.

The most recent gains have been more modest, as anxieties in the market build over valuations, lowered volumes and a fluctuating dollar, which has been pushed around by inconsistent musings, emanating from various Federal Reserve officials and the recently released minutes from their last meeting.

The slow grind higher, deeper and deeper into record territory, for the major U.S. average, actually, has been orderly, and earnings have been decent enough, replete with standouts and disappointments, to legitimately power the market higher.

But a troubling factor for the rally, of late has been diminished volumes, which are, of course, not uncommon in the month of August.

At the same time, the recent action in the S&P 500 has the look of potentially working on the installation a rounded-top formation, which is bearish.

"The summer rally has truly been a summer fling, and the fall and start of winter will bring forth realities that we've been able to overlook for quite a while."

For all the disjointed Fed speak over the summer, the comments on Sunday by the Vice Chairman of the Federal Reserve, Stanley Fischer, were telling, if not clear. He crowed that the Fed is much closer to its target inflation and unemployment rates than the market seemed to think. And that spells trouble for the rally too.

Regardless of the propriety of any Fed tightening, at this point, or in a few months, the markets will react badly to the looming tightening, as we have seen.

The rally has subsisted, in part, on successive easing moves by various of the global central banks, most recently Japan and the Bank of England, where there is more to come. But the Fed is the straw that stirs the drink, and tightening seems as sure to come in September.

As the British and Europeans return from summer vacation, the Brexit plans begin to be readied and brought into focus, as the E.U. leadership becomes impatient and political pressure on the U.K.'s prime minister mounts.

Those pesky banks in Italy and Portugal are set to be a renewed source of anxiety for the markets, as well.

As we have seen from the recent trading in the dollar index, action (or inaction) by the Fed gets rapidly priced in. With those employment and inflation targets, apparently, at hand, the necessary policy response will push the dollar higher. Something else for the equity markets not to like.

Adding to the negative set for stocks, oil prices are set to fall, again, in the fall, as well. A shutdown of Chinese industry to clear the air, literally, for the G20 meeting will impact demand, along with the undertaking of seasonal maintenance by U.S. refiners, as they shutdown to retool to emphasize the production of winter fuels. We all know the drag that a plunge in oil prices can be on the stock market.

Much of the equity market gains, post-Brexit, are likely to be retraced, with the November election also acting as a letdown, no matter the outcome.

The summer rally has truly been a summer fling, and the fall and start of winter will bring forth realities that we've been able to overlook for quite a while.

Will the S&P 500 fall all the way back to 1800 by year-end? Probably not. But finishing the year sub-2000, is quite likely, given the headwinds that await.

In literature, summer flings can get over romanticized, but here's a good quote from Nicholas Sparks that sums them up: "…in a flash, they're gone."

Commentary by John Kilduff, a partner at Again Capital, an investment-management firm that specializes in commodities. Follow him on Twitter @KilduffReport.

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