Larry Summers for Fed Chairman?

The S&P500 lost a little over 1% last week on abysmally low summer trading volumes. Volatility crept up over 10%, as measured by the VIX, but it’s still near multi-year lows. There was certainly no panic in the selling activity last week.

In a light week for data releases, the ISM services index beat expectations. And so did international trade; in other words, the trade deficit improved more than expected. Consumer credit rose less than economists predicted. Initial jobless claims were slightly better than the consensus forecast. And finally, wholesale trade missed.

So the US economy, while not falling apart, is limping along at near stall-speed in terms of growth. Meanwhile, the US stock markets, near all-time highs, are priced for perfection, not only in terms of corporate earnings growth, but also in terms of strong US economic growth expectations.

Technically, the S&P500 has turned down on a shorter term basis, specifically on the daily charts. This suggests that there might be some more near term selling ahead. But on the longer-term weekly and monthly charts, the S&P is still pushing clearly into overbought levels. And longer-term momentum still favors some continuation to the upside. On the other hand, market internals are turning bearish. It seems as though fewer and fewer market leaders are responsible for the overall market advance, while many other firms are lagging behind in appreciation or even starting to drop in price. This is often a sign that the stock market is poised for a more meaningful pullback.

Talks of the ‘taper’ in the Fed’s QE policy is quickly shifting to heated discussions about the successor to the Fed’s leadership role, now occupied by Ben Bernanke, who has announced that he will not be seeking another term when his current term expires in January. So Barack Obama will soon need to announce a candidate, subject to approval by the Senate, to become the next chairman.

For the last year or so, the current vice-chair, Janet Yellen, has been the odds on favorite to succeed Bernanke, and the risk markets (especially stocks) loved this because if anything, Yellen has expressed an inclination to print even more money than Bernanke. And as we all know, in the short-term, this QE printing program has helped prop up equity prices, especially since the printing is currently open-ended, the taper notwithstanding.

But in the last two weeks, former Treasury Secretary and while house economic advisor and close friend of Barack Obama, Larry Summers has emerged as the new front-runner to replace Bernanke.

Why could this be important to stocks?

Simple—Mr. Summers, over the course of numerous discussions and presentations in the last year, has openly questioned the effectiveness of QE. So, if nominated and confirmed, there would be a greater risk that QE gets shut down instead of just cut back slightly (the taper).

And if this were to occur, then the stock markets in the US, and likely around the developed world, could throw a temper tantrum by selling off very hard.

So stay tuned. Obama must make his decision very soon. Maybe this could be the straw that breaks the camel’s back in terms of the artificial manipulation of stock markets.

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