Circling the wagons is essentially what happened on Tuesday. First the very weak try at an early rally showed Monday to be a 'one-day-wonder' (that was a thought we had yesterday); not a big reversal of increasing sentiment 'risk-off' returning to the fore. An early sell-off might get blamed on the EU/Ireland/Apple confrontation (which we discussed in detail yesterday before the actual release) while the ensuing purge might get blamed on the Bloomberg interview with Fed Vice Chairman Stanley Fischer; although the late comeback is more pertinent.

How so; well, Friday was an 'outside-down-day' technically speaking. And that's often a sign of a reversal, especially at extended levels (higher high, lower low, and lower close for those unfamiliar with the pattern that's well-watched by lots of traders who take note when it occurs). The late low today (Tuesday) was just a smidgen above the intraday Friday low; and I suspect trading desks were just a bit nervous about it breaking; so they brought it back somewhat to the close.

That was a fairly classic 'save', but late in the session and more associated with intraday squaring than much else. If they subsequently (with these light-volume semi-holiday crowds in a week up to Labor Day) break the Friday low, you could get a bit of a vacuum since there is not much liquidity (or interest) around in a summer-doldrum week like this.

More on the Fed (and hike odds) below; but the market is vulnerable regardless now. At the moment there's little volatility in the market, but that's likely to shift in short-order, and could do so swiftly, as hinted at by last Friday's action. We don't think this is a market to liquidate core investments (and have not believed so at any time); while an investor generally should be comfortable holding whatever is retained through a decline that could be from 10% to as deep as 30-50%. With so little upside potential; even if the market goes higher should the Fed not hike, that's a warning of a petrified (inaction) Fed, and the hook might be it drops after that 'anyway'. We'd definitely err on the side of caution here. It's a long saga for sure, but it is what it is; and those that are fully invested shouldn't breathe easy as they haven't seen much progress of-late; plus are exposed to serious risk.

In sum: domestically the market focus reflects concern about international and financial conditions. Job participation 'may' say go-forward to the Fed; but this is way beyond that, when you look at the global environment.

Stan Fisher did NOT say 'negative rates are good' as was reported. I listened: he said 'countries that have negative rates SEEM to think they're doing better with that'. He's saying it is their view, not his view. The Fed doesn't want a stronger US Dollar; but they'll just have to tolerate (our forecast) firm-to-higher Dollar in this scenario.

Bottom line: the rotation and cyclicality of the market is a reflection not of much optimism (like buying the airlines, which might seem counter-intuitive, or banks, 'as if' rates were going up so much that it would really help their prospects), but an effort to hold the Senior Indexes together while avoiding multinationals a bit.

This is part of 'circling the wagons'; a defensive strategy primarily by those really unable to short anything, or even be in cash. I've always viewed requirements, as some major mutual funds maintain, to remain fully invested, as ridiculous. If a market takes a 20-30% hit, the fund manager goes crazy shuffling portfolios; as he or she doesn't have the flexibility to put fresh or sidelined funds to work.

It's a reason why managers tend to have mediocre performance in years when the market takes a hit, even if the market subsequently recovers nicely. And it's a reason why true hedge funds have done better; but few this year, as most got very bearish on the market (analytically correct but too heavily); such as we've discussed in the past. Our own view has been more hit and run and build cash; not shorting individual stocks at all.

Conclusion: the market may be awaiting the Hillary emails; the G20 meeting; or even the FOMC meeting next month. At the same time the S&P tries rebounding from sort of (lower band) support; with an unspoken awareness that breaking last Friday's low could trigger a spill.

We continue (in-part; partial gains taken) short from Sept. S&P 2183. If that comes out in the morning, expect us to do it again for traders. Why not; most all of the last such efforts have worked well; taking partial profits on interim drops. Whether we'd be short or not in front of Friday's Jobs report is hard to say; may depend on where the S&P is trading come Thursday afternoon.