Transports Strength May be Sending a Message to China

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U.S. stocks started the week with another round of selling as the impact of a sharp sell-off in China hit the world’s financial markets. The Dow Jones Industrial Average fell 0.7% to the lowest level in six months as China’s Shanghai Composite plummeted 8.5%.

The S&P 500 was off 0.6%, and the Nasdaq dropped 1%. International markets were even harder hit with France’s CAC and Germany’s DAX both down 2.6%. The U.K.’s FTSE 100 fell 1.1%.

Nine of the 10 S&P sectors lost ground, with interest-sensitive utilities the only gainer. The Dow Jones Utility Average closed 1.4% higher. But the economically sensitive Dow Jones Transportation Average fell less than the others, off just 0.2% on lower-than-average volume.

Gold rose 1% to $1,096.50 an ounce, reflecting investors’ flight to safety, as did the increase in the price of the 10-year note, with its yield falling to 2.23%.

The health care sector benefited from better-than-expected earnings from Teva Pharmaceutical Industries Ltd (ADR) (TEVA) and news of its acquisition of Allergan PLC’s (AGN) generic drug business for a reported $40.5 billion.

Durable goods orders rose 3.4% in June after a decline in May. Analysts had expected an increase of 3%.

At Monday’s close, the Dow fell 128 points to 17,441, the S&P 500 lost 12 points at 2,068, the Nasdaq was down 49 points at 5,040, and the Russell 2000 was off 11 points at 1,215.

The NYSE’s primary market traded 905 million shares with total volume of 3.7 billion. The Nasdaq crossed 2 billion shares. On the Big Board, decliners outpaced advancers by 2.6-to-1, and on the Nasdaq, decliners led by 2.4-to-1.

Nasdaq Chart
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Chart Key

The Nasdaq’s chart stands out as holding its trend despite its reversal from July’s all-time high. But Monday’s gap down through the 20-day and 50-day moving averages could be a prelude to an attack on the intermediate trendline (red dash line), and then the 200-day moving average at 4,850.62.

It appears that there is more selling to come as signaled by higher-than-average downside volume and a fresh MACD short-term sell signal.

Dow Jones Transportation Average Chart
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While the world’s markets were in free fall, apparently feeling the impact of a slowing economy in China, the Dow Jones Transportation Average hardly declined. Perhaps the transports are telling us that the U.S. economy is not going to feel the impact of China’s slowdown and is a powerful example of the strength of free market capitalism.

Conclusion

Today’s lesson: No government, even China’s, has the power to control the eventual direction of world, or even domestic, stock markets.

After months of China artificially propping up its markets, along with demands that the U.S. dollar be replaced by the yuan as the world’s reserve currency, the true nature of the inherent weakness of a system controlled by a central committee is being revealed.

Its ghost cities, built to keep employment high but with no residents, and its demands to control every facet of life from birth to death have again been revealed as inadequate to control human behavior. While the free market’s input from literally billions of buyers and sellers is the most democratic form of individual ownership representation, China still can’t seem to come to grips with the simple truth that with all of its flaws, capitalism still outproduces every other “ism” in human history.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.


Article printed from InvestorPlace Media, https://investorplace.com/2015/07/daily-market-outlook-transports-strength-may-be-sending-a-message-to-china/.

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