While equities have been trading in a tight range on low volumes during a seasonally slow summer, I expect volatility to increase as traders and fund managers return from vacation. Given deteriorating fundamentals, I believe upside for the S&P is probably capped at 1,130 with significantly more downside risk. Although I am not in the double-dip camp, I believe uncertainty has persisted due to worsening economic data and looming November election, and should continue to weigh on the markets. Until we get better economic data and clarity out of Washington, investors' appetite for risk will remain low. The VIX (CBOE volatility index) has been consolidating in a tight range (~23-28) as well after escaping a steep downtrend and looks poised to break out. I believe the VIX should break to the upside as risk aversion typically increases as we approach year-end.
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