Stocks Rotating Toward Risk, but Will It Outlast the FOMC Call?

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Futures moved up five points in the middle of the night on word that there would be no delay in the German Constitutional Court's ruling on the European Stability Mechanism (ESM) tomorrow. There had been a last-minute attempt to delay a ruling.

So the ruling will come tomorrow morning. The betting is the constitutionality of the ESM will be upheld. What's not sure is what conditions might be imposed that would limit the ability of German to enter into future bailouts. Will there be a requirement that any further bailouts that would increase European integration would require a change in its constitution?

Regardless. The stock market has been acting like it wants to rotate more toward the risk end of the trading spectrum. There has been a bit more interest in the "value" end of the spectrum (financials, energy, materials), and less interest in the more expensive "defensive" names like consumer staples and pharma.

Coal stocks are up another two percent this morning. European bank stocks also up.

The problem with this scenario: Central bank stimulus aside, it is not at all clear that we are near some kind of bottom in global growth, and that third quarter is the bottom of the earnings trough.

The most likely path to the end of the year seems to be a trading range ... you can make it as wide as you want, but 1,300 to 1,450 is often mentioned. Many strategists have year-end price targets in the 1,425 to 1,450 range. Since we are already at 1,429, a more cautious attitude is certainly understandable. As would be calls for a modest pullback after the Federal Open Market Commitee announcement.


1) Knight Capital Group has hired International Business Machines to conduct a review of what happened with its Aug. 1 trading snafu and on other "product development lifecycle processes." It began work on Aug. 27, and results are expected by the fall. The news was unveiled while CEO Tom Joyce, was speaking at a Barclays Financial Services Conference.

Why IBM? Joyce did not say, but it highlights the fact that this was primarily a software problem. Software was incorrectly installed and the incompatibility between old and new code triggered the dormant code, which started sending out orders.

2) Luxury goods makers are trading down in the U.S.: Coach down 3.3 percent, Tiffany down 2.5 percent, LVMH down 4 percent in London. Burberry has its worst day ever, falling more than 19 percent, after the British fashion brand issued a profit warning as the global slowdown crimps demand for luxury goods. The retailer said it expects full-year profit to be around the lower end of market forecasts after same-store sales failed to grow in the 10 weeks to Sept. 8, the bulk of Burberry’s second quarter. Shares sit near a 52-week low, dragging down other luxury brands: Italy’s Salvatore Ferragamo and France’s Christian Dior and LVMH all slump about 5 percent.

3) Apple leading up to iPhone launch. This is the fifth Apple iPhone refresh. Raymond James had an interesting note this morning, noting that Apple shares have outperformed the S&P 500 index every year for the month prior to an iPhone announcement, with average outperformance of 5.5 percent. Between the announcement date and the launch date, it has also outperformed by an average of 2.5 percent. After the launch, Apple has underperformed the S&P 500 three of four trading periods for one month after the launch, by an average of 4.2 percent. (Read More: Apple: Buy Company Shares on Rumor, Sell on News?)

—By CNBC’s Bob Pisani

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