An absence of many bids increasingly limited intraday rebound efforts; from fairly wild swings (suggesting low liquidity, and incidentally inline with the pattern calls) on Monday, to throttled behavior Tuesday; then faltering upside with a more aggressive afternoon sell-off (which we caught in both directions). It reflects the noted anxiety.

But the point is not revelations of obvious holding actions expected ahead of Janet Yellen's Jackson Hole Friday speech (which everyone will closely focus upon); but the growing chorus that agrees the market isn't really set up for a September rate hike by the Fed. That prompts some to believe that even a 'hint' of hawkishness from Yellen is going to take the market down.

Perhaps so; but the other side of the equation is that could be followed by desperate (even if faltering just after) rebounds, as the passive investing crowd (that makes few decisions when they simply throw money into 'what works' or they hope works Index plays) panics first then throws money in. OR, Chair Yellen might avoid unsettling rate remarks; the market breathes a sigh-of-relief and then sells-off.

Well which way?

The problem with the future is that its history isn't known yet.

Or is it in this case? After all we DO know that two-thirds of the FOMC voting members were FOR a rate hike in the July FOMC meeting vote. And we know that resisting were the Chicago Fed, Minneapolis Fed, and New York; as well as Yellen herself. We also now hear (as noted before) NY Fed's Dudley change his tune a bit last Friday. That can be a clue about the future, and suggest 'at least' reasonable reference to a hike Friday.

So in that respect the future is know; and becomes a question of 'when' not 'if'. That take me back to the worries in Chicago and Peoria. They ought to be worried about the Illinois underfunded Pension Fund mess, and the disaster than a tax hike to cover lowered .. yes lowered but closer to a realistic... actuarial goals might trigger. That's another topic, but keep an eye on Illinois, as one of the biggest threats to financial stability happens to be underfunded pension funds that function as state-sanctioned Ponzi schemes if one thinks about it (taking from the future recipients to pay the past and near-term, with full knowledge that that inflows can't possibly fulfill obligations).

Technically the break, when it comes, may be heavy but rebound; but what it won't likely achieve, is to make it just a minor dip that subsequently goes onward and upward.

That ensuing sell-off (not the initial one) would be when algorithmic signals take-over and deliver a resounding thump to the market; negating the 'don't worry be happy' overly sanguine guidance the majority of pundits and analysts advocate. We'll see of course; but it seems to me that the optimists are inherently nervous enough to try to head-off the 'surprise' impact (not of Yellen's speech, but) of any coming shakeout.

Fundamentally the spin about a seriously better economy is what they need for sort of a backdrop of any Fed firming move; and they don't really have it. By that I refer to a glorification of housing (well after the majority of the move enhanced artificially by a lower rate environment, and slowly at that until recent middle-market gains reported); that is contradicted by lower existing home sales (presumed to be by slack inventory but I checked two strong metro markets and saw no such inventory dearth). They will talk of retail being strong (again a couple stores) and then a dozen come forth with at minimal marginal reports, or worse (Express is not so out-of-fashion as reporters say; but they need an explanation other than to say a less-pricey Zara or H&M is grabbing the low-priced, but current-style, youth industry). So the 'earnings rebound' may occur but much lighter than wishful thinking goals. 'They say' 3% growth; but relative to the recent past that's not so impressive. In fact one should want far more if it's robust.

Bottom line: We see the Fed as way past time to hike; but for reasons beyond bullish or bearish superficial implications. It's more about being behind the curve without any 'cushion' in a financial emergency; it's noticing the spreads that exist here and abroad as well as knowing that the longer they wait the more impossible things become.

So far we congratulate the Fed (with Bernanke's policies) for navigating this far minus a disaster; which we knew from the start they might (called it 'threading a needle'). At the same time it was a dangerous approach; it was sustained far too long creating the syndrome of restraining the economy while facilitating financial asset categories.

We will never know for sure, but believe U.S. Household Income would be stronger if this Fed 'emergency' low rates were lifted long ago, rather than keep us in 'Controlled Depression' for such a long time. In my view we would not have cratered if they went to normalized rates; but would have dipped and prospered more. We still can; but by waiting so long, the chances of a more dramatic (low liquidity) crisis can't be ruled-out now. I think the Fed knows this, which is why their stance has been so wispy-washy in the way they tease financial markets, and then lose credibility by showing no courage. All they do (and this part is valid) is blame the lack of concurrent fiscal moves.

Conclusion:

While we do have an intraday short retained overnight with solid gain as well as risk removed (via partial sale and a breakeven mental stop on the balance); it is conceivable this market attempts to move up in advance or after Janet Yellen; then comes down (all depends; but the hints are that she 'will' address 'rate normalization', which implies a discussion of it, transparent hints or not). One of the rubs to all this is that other forces are building and generally overlooked as the focus is Jackson Hole.