In a bid to garner enough support to pass the spending cuts, Mr. Samaras has gone out on a limb saying that no further austerity is needed. However, if Greece misses promised budget targets to international creditors it may be forced to impose additional painful cuts in an economy that has been shrinking for five years. — WSJ

Mr. Cameron and other leaders are facing electorates that have become increasingly reluctant to foot the bill for European integration. And the debt problems of the countries that use the euro, perhaps the most prominent symbol of the bloc’s integration, have only made politicians more skeptical of forging closer ties with their European neighbors. — WSJ

- - - - - - - - - - - - - 

Political trends in Europe continue to worsen.  As I stated in my mid-year outlook in July, kicking the can has now become the worst action officials can take.  As economic conditions continue to deteriorate, citizens will become even more irate and less eager to unite as one Europe.  A political event may not be far off that causes a disorderly fragmentation of the Eurozone.     

In the past, Treasuries would have a prolonged period of selling after a QE announcement.  Not this time around.  Growth concerns have quickly come to the fore again, despite pledges of open-ended QE.  This is a red flag for equity investors in my view. It’s a sign that investors are clearly losing faith in the Fed engineering a recovery via monetary easing.  

As always, it’s prudent to pay attention to the technicals for signs of a weakening of the current rally.  It feels like sentiment is turning bearish.  I’d be snatching profits from the strong run up since the June lows.  

Manufacturing activity in the central Atlantic region contracted at a less pronounced rate this month, after deteriorating in July, according to the Richmond Fed’s latest seasonally adjusted survey. Looking at the main components of activity, shipments edged higher, employment turned negative, and the weakness in new orders moderated somewhat. Evidence of diminished weakness was also reflected in most other indicators. District contacts reported that backlogs, capacity utilization, and delivery times remained negative but improved from July readings. Moreover, finished goods inventories grew at a slightly slower pace, while growth in raw materials was nearly unchanged. — Businessweek

- - - - - - - - - - - - - 

Contraction was less pronounced, but leading indicators point to more weakness next month.  

The Aussi Dollar looks like an enticing short given continued sour news on the housing front.  There is reason to believe that a real estate bubble is popping in the island continent…especially if China undergoes a hardlanding.  

Old news here, just catching up:

Order books shrivelled at the fastest rate since June 2009 - a much worse situation than portrayed in the flash reading two weeks ago, and one that augurs badly for business activity in August.

While companies in Italy and Spain performed particularly poorly in July, the PMI showed the euro zone’s biggest and most resilient economy is now floundering too.

“The big worry is that the downturn in Germany may be becoming more entrenched, suggesting that the largest euro economies are seeing convergence in collective and mutually-reinforcing decline,” said Chris Williamson, chief economist at survey compiler Markit. — Markit

According to the AIA, there is an “approximate nine to twelve month lag time between architecture billings and construction spending” on non-residential construction. This suggests further weakness in CRE investment later this year and into next year (it will be some time before investment in offices and malls increases). — Bill McBride

Transports are waving red flags with respect to the latest rally.  ATA’s truck tonnage index has been flat to a slightly downward trend for much of the year, while FTR Associates’s trucking conditions continue to deteriorate (granted they see the index rising due seasonality).

Perhaps the most telling red flag is a clear non confirmation of the Dow Theory.  The transports are clearly not confirming a new high in the Dow Jones Industrial Average as seen below.  

This is a bullish development.  However, it’s clear that these interventions are having less and less effect.  Keep an eye on the S&P 500 resistance area of 1,358-1,360.  We have a few strong trend lines as well as the 100 day MA.  If we break through here, then the market could go higher as continued improved sentiment will lead to higher equity prices.  

However, if the S&P 500 is unsuccessful, this would be the first time I know of that markets could not rally on word of monetary accommodation.  Investors would be in big trouble (Pop of Moral Hazard Bubble?). 

It’s too difficult to predict what will happen in the short term given the political consideration (how mad they are in the Eurozone); however, the market wants movement toward a political/fiscal union at this point, not more juice.  

See two posts down.  More confusion to an already uncertain outlook.  

Coupled with a weak Empire Manufacturing Index and falling industrial production, the economy is particularly vulnerable to any further deteriorating conditions in Europe and China.  

On the bullish side, investors increasingly believe that a pro-bailout party will win the election and that the moment of reckoning isn’t this weekend.  Furthermore, all central banks are ready to pounce with QE should Greece begin to exit the Eurozone.  Technically the S&P 500 has completed a reverse head and shoulders on strong volume and good breadth.  

A long straddle option strategy on the S&P 500 would be an interesting proposition.  It’s anyone’s guess what Monday will look like, though the bulls may be on to something here.  It all depends on the Greek elections.