Get ready for market thrills

• No new trades.

The next six months should be anything but dull.

Seasonally, the third quarter is the toughest for the markets. October generally gets all of the press, but September is no walk in the park. Will it be different this time? That's what makes it a market; we'll all just have to wait and see.

Interest rates generally dictate the mood on Wall Street. While stocks can go up in an environment of rising interest rates, it's about as much fun as pushing a string uphill. June has been the turning point for a couple of years now, with rates completing a move and reversing direction. Indeed, we saw the 10-year Treasury move from 4.5% to a couple of overnight forays at 5.3% before settling back down closer to 5%.

The Bank of England raised its overnight lending rate to 5.75%. German 10-year bunds are trading in the mid-fours, close to where Treasurys were just a few short months ago. The accepted explanation for these rising rates is that inflation is rearing its ugly head once again. With crude oil trading north of $70 and a revived Commodity Research Bureau index showing signs of life, not to mention that the cost of corn is winding its way through the U.S. food system, rising inflation isn't that tough of a sell.

Watching utilities and banks

Utility stocks traditionally are an early warning system, not only for interest rates but for the broader market as well. After peaking at 537.12, the Dow Jones Utility Average ($UTIL) has tested the 485 level a couple of times and is currently around 500. Unless the DJUA breaches the 537.12 area, it is safe to presume that a top is in place.

In addition to the utilities, other areas of the markets sensitive to interest rates, particularly the banks, have been nothing if not punk. Can the markets move significantly higher without the utilities and banks? Of course they can. The markets can do whatever they want; it's just pretty tough sledding.

September futures expire Aug. 24. It will be interesting to see if the 10-year Treasury tests the 5.3% area again between September and the end of November, when the December futures expire. My thought is that if 5.3% holds through November, then Santa Claus should arrive on schedule; if not, then all bets are off.

'We'll know soon'

All of these questions may be answered by what happens with the subprime mortgage bonds that are held by so many hedge funds. Arguably, many of these bonds aren't marked to market. My guess is that no one wants to see them marked to market. I further guess that this has more to do with rising rates than is currently being discussed. As my grandfather often would say, "We'll know soon."

So this is the backdrop as I see it as we embark on this next round of Strategy Lab. Will it be fun? Fun is in the eye of the beholder. One thing is for certain: It won't be boring.