A sharp sell-off in China sent shock waves around the financial world yesterday, and U.S. stocks were hit, too.
On Monday, the Shanghai Composite Index fell 6.7%, hitting a three-month closing low as the government tightened credit. Technology stocks took the brunt of the impact from Shanghai, but a late rally erased half of the losses, and the S&P 500 (SPX) closed lower by only 0.8%.
The Dow Jones Industrial Average (DJI) fell 0.5%, with Alcoa (AA), Caterpillar (CAT) and Boeing (BA) falling more than 3%.
At the end of the day, losses were marginal with health care stocks down 0.2%, financials off 0.4%, and diversified banks up 0.8%.
Some traders cited nervousness over the results in China and others worried that September historically has been a difficult month for stocks. They have averaged a decline of 1.1% in September using data going back to 1900. According to Ned Davis Research, and quoted by the Wall Street Journal, September is the only month that has negative performance over that time frame.
The worst losses yesterday were in energy and basic commodities.
BJ Services (BJS) bucked the trend and was up 9.63% because of its buyout by Baker Hughes (BHI), which fell 3.64%.
In another M&A story, Disney (DIS) announced a takeover of Marvel (MVL). DIS fell 0.8% and MVL gained 9.72%.
At the close, the Dow was down 48 points to 9,496, the S&P 500 fell 8 points to 1,021, and the Nasdaq (NASD) was off 20 points to 2,009.
The NYSE traded 1.4 billion shares with decliners ahead of advancers by almost 3-to-1. The Nasdaq crossed 714 million shares, and decliners were ahead by more than 2-to-1.
Crude oil (October contract) settled at $69.96, down $2.78, over doubts of China’s future economic growth, and the Energy Select Sector SPDR (XLE) fell $1.01 to $51.17.
December gold fell $5.30 to $953.50, and the PHLX Gold/Silver Index (XAU) fell $3.45 to $147.04.
What the Markets Are Saying
With stocks hitting slightly new highs in four out of five days last week and volume trailing, it is likely that the market is in need of a rest. However, the overall trend is quite bullish — and the bullishness is not only long-term, but intermediate-term as well.
Consider, for example, the S&P 500’s intermediate trendline that connects from the May 7, June 2, Aug. 7, and Aug. 25 tops, and marks the upper range of a bull channel.
This has been a very orderly advance with one exception — the pullback from June 11 to July 8, which quickly flashed oversold from every internal and sentiment indicator, and in just three days brought prices back again into the channel. The current support line of the channel is at 990.
A break of 990 would signal that more selling is likely.
But even then the worst that could be expected would be a selloff to 940 to 960. Support in that zone is the result of the consolidation from April to July.
But the more likely outcome of the current pause is that, after a short breather, which could last until Labor Day, stocks will most likely resume their uptrend, and attain our longer-term target of S&P 1,245 before year-end.
Why?
Because a successful run against the resistance line of the current channel is so similar to the December 2003 run that resulted in 60 more S&P points.
And that run, like the present possibility, was successful because virtually no resistance was encountered on the other side of the chart from May to June 2002. That lack of resistance matches the fall from Sept. 26, 2008, at 1,106, to Oct. 10, 2008, at 840.
Today’s Trading Landscape
Earnings to be reported include: ADC TeleCommunications (ADCT), America’s Car-Mart (CRMT), Applied Signal Technology (APSG), DHT Maritime (DHT), Donaldson Co. (DCI), Finisar Corp. (FNSR), Pike Electric Corp. (PIKE), Take-Two Interactive Software (TTWO) and VeriFone Holdings (PAY).
Economic reports due: ISM (the consensus expects 50.5%), construction spending (the consensus expects 0.2%), and vehicle sales.
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