GDP Report Looms Large

Is the U.S. about to experience its first decline in GDP in more than 8 years?

Investors won't have long to wait. Revised second quarter GDP will be released Wednesday morning, and the consensus is that it will be revised from 0.7% to 0.0% - a stagnant quarter for the economy. Since the initial GDP reading came out in July, some new reports for June - such as inventories and trade balance - show that the economy was likely flat or down in the second quarter.

Some economists - among them Stephen Roach of Morgan Stanley - are expecting the GDP number to come in at -0.2%. And given how far off economists were the first time around (they predicted 1.2% growth for the first reading), a negative surprise isn't out of the question for Wednesday.

But regardless of where the number comes in, the global economy is facing an unusual problem: The world's biggest economies - the U.S., Europe and Japan - are all stagnating or declining at the same time. Unlike 1998, there is no engine to pull the global economy out of its slump. That does not bode well for a quick economic recovery.

The good news is that the European Central Bank may cut rates on Thursday, so the U.S. GDP report could be quickly forgotten. Japan, however, could deliver negative news soon after: banks are expected to restructure their balance sheets to reflect the real value of their holdings on September 1, a "mark to market" exercise that some believe could lead to bank failures; and Japan's GDP on September 7 is expected to show a decline of about 3.8%.

Where's the volatility? Market technicians want to know. The VIX, the CBOE options volatility index, has been flat or declining along with the stock market since the May 22 top (see chart below).

This is worrisome for the bullish case because the VIX normally rises when the market declines, indicating fear among options players, and market bottoms tend to coincide with VIX readings of 35 or higher. The April 4 bottom coincided with a VIX reading of 40. On Friday, however, the VIX fell to 22.29, below its level at the May 22 top. Recent rises in the VIX have failed to clear the index's 200-day moving average, showing that complacency has been the rule in the stock market's three-month slide.

The VIX has been lower before (it hit 18 just before last year's top on September 1), but it is one of several signs that the three-month correction has done little to dampen investor enthusiasm. Bottoms tend to occur when investors stop looking for the bottom and throw in the towel. We're not there yet.

The other side of the equation is that the commercial futures traders remain bearish on this market by a wide margin, showing little change in their bearish posture on the market again last week. With the smart money short or on the sidelines, and everyone else bullish, Friday sure didn't look like April 4 to us.

And some have tomorrow as an important cycle turn date, just in time for that GDP report.

A few earnings reports of note this week: Ulticom reports after the close tonight. Comverse Technology reports after the close tomorrow (a report that could affect wireless stocks like Openwave ). And stodgy Tech Data , an important barometer of IT spending, reports on Wednesday.