For investors looking for a silver lining on a day that otherwise lacked positive signs to point to, Monday represented the last trading day of August and a sixth consecutive monthly gain for the S&P 500. Still, the measure of the 500 largest U.S. stocks closed down 0.8% to 1020.63 and the Dow Jones Industrial Average fared no better, slumping nearly 48 points to 9496.28. Technology provided no respite for the bulls as the Nasdaq tumbled nearly 20 points to finish the day at 2009.06. Certainly not the best way to cap off August and head into September, which is traditionally the worst month of the year for stocks.
While one day does not beget a trend, it is worth noting that Monday's declines follow up some rather meager increases for stocks last week. Last week's market action kind of felt like it was down week although it was not and I am not going to say I told you so because I did not, but the fashion in which the market ended last week did indicate a day like today was right around the corner. Monday's activity probably has increased the population of the ''too far, too fast'' camp. This group seems to get a little louder every time the market has a down day and it seems like they are trying to assuage the world, themselves included, that a couple of down days here and there are not such a bad thing.
Even with Monday's declines, the S&P 500 tacked on 3.4% in August while the Dow added 3.5%. Tidy gains to be sure, but an asterisk may belong next to those statistics because financials were top performers in August, soaring 13%. What is becoming apparent is that U.S. markets are no longer the leader that other global markets look to for direction. The best case scenario is that U.S. indexes now share that crown with the Shanghai Composite Index, which dropped nearly 7% today and that may have been the catalyst that pressured U.S. equities.
If you thought that U.S. stocks had come too far too fast, Chinese stocks will certainly make you blush. The iShares FTSE/Xinhua China 25 Index ETF (FXI) soared 62% from early April to late July, but has had a tough go of things in August. Monday's close $40 is not a good thing. The close below the 50-day moving average at $39.86 might portend more pain is on the way for Chinese equities.
Beyond the decline in Chinese stocks, there was something else that the bulls may find concerning. Not even a return, albeit probably temporary, of ''Merger Monday'' was enough to stoke the flames of the rally. Two sizable deals totaling $9.5 billion were announced and given the decline in merger and acquisition activity over the past year, which the chart below illustrates, it would have been logical to assume the market would have responded to today's deals.
Well, that just was not the case. Disney (DIS) is shelling out $4 billion in cash and stock to bring Spiderman and the X-Men under the Mickey Mouse umbrella by acquiring Marvel Entertainment (MVL). As I noted in the Market Monitor, Standard & Poors has put Disney's long-term debt ratings on Credit Watch with negative implications because Disney may have to issue some new debt to get the deal done.
In the energy patch, oil services firm Baker Hughes (BHI) said it will acquire BJ Services (BJS) for $5.5 billion to increase its presence in the natural gas shale arena. BJ Services was spun off from Baker Hughes in 1990. An odd bet to be sure considering how much pressure natural gas prices have been under lately, but Bloomberg News said this is the largest takeover by an oilfield services firm in 11 years and even that was not enough to spark stocks to a better day.
Speaking of M&A activity, Morgan Stanley (MS), the leader in M&A advisory in 2009, was downgraded by Bank of America to ''neutral'' from ''buy'' due to rising compensation costs and the fact Morgan Stanley shares no longer trade at a deep discount. Morgan Stanley was not involved in the Baker Hughes/ BJ Services deal, nor was it involved in the Disney/Marvel. Adding some salt to Morgan Stanley's wounds is the fact that rival Goldman Sachs (GS)advised both Baker Hughes and Disney on their respective deals.
Morgan Stanley had been consolidating around $30, but even though the stock dropped just 55 cents today, that took it below $30 and very close to support at the 50-day moving average of $28.54.
Morgan Stanley Chart
It was not the best of days for commodities either as the Reuters/Jefferies CRB Index, which tracks 19 commodities, slumped 1.6% led by crude oil's decline back below $70 a barrel and retreats in heating oil and gasoline. It is not really surprising to see commodities show some weakness on a day when Chinese stocks do the same and that made Alcoa (AA), the world's largest aluminum maker, the biggest loser in the Dow.
Of course, if I am going to mention China and commodities that means copper has to be in the discussion and that means I have to mention Freeport McMoRan. The world's largest copper producer is a name I mention frequently and the stock has nearly doubled since April. I started to get curious about put activity in the Freeport and found some decent action in the September 60 and 65 puts today. My best guess is that if these puts were purchased they may be protection for long stock positions. Either way, the commodities story is a China story and Freeport will likely be held hostage by that scenario going forward.
As you have probably gathered if you regularly join me here on Mondays, I am a big fan of interesting little facts that can serve to illuminate broader trends. You know, the kind of facts that will win you a few bets at the 19th hole or make you the toast of the next cocktail party you attend. Today's tidbit concerns the rapid pace of stock sales by company executives, which according to TrimTabs, reached $6.1 billion in August. The ratio of insider selling to buying now resides at 30 to 6, the highest level since TrimTabs starting tracking insider purchases and sales in 2004.
In dollar terms, the $6.1 billion in August sales is the most since May 2008. Now there is nothing wrong with taking some profits and the recent market rally has given ample opportunity to do so. Company executives should be entitled to do so. That said, history has proven that it does pay to watch insider buying and selling. TrimTabs added that U.S. public companies have shed $105.2 billion of their own shares in the past four months.
I could not find a chart that illustrates the insider sales, but I did find one that highlights the decline in insider buying over the past few months. If you had followed this chart, the rise in insider selling would not have caught you by surprise.
Insider Buying Chart
Insider sales are just one factor that may indicate the rally may finally be poised to take a breather. The other bearish indicator I came across over the weekend (perhaps I should get out more) is that short interest on the New York Stock Exchange fell by more than 10% in the second half of July. Short interest is an inverse indicator, meaning that declining short interest is not necessarily a good thing because if there are fewer short positions, that means there will be less buying to cover and less buying period.
Many a pundit has argued that this rally has been fueled in large part by short covering and if that well proves dry, the bulls may indeed be forced to head for the sidelines. One individual example may be American International Group (AIG), which, let me be honest, rose nearly eight-fold in less than two months for no good reason, at least no good fundamental reason. It is hard to quantify in percentage terms, but it is safe to assume that the bulk of AIG's rally was due to short covering.
AIG was down almost 10% on Monday and guess what? Its short interest was down 2% through the first half of August.
There is a cavalcade of economic data this week that will determine the tenor of the market heading into the Labor Day holiday and perhaps for the rest of September. Tuesday brings an update on the ISM Manufacturing Index, which is expected to rise to 50.5 from 48.9. Wednesday will have two news catalysts with factory orders and minutes from the Federal Open Market Committee's August meeting. On Thursday, the ISM non-manufacturing report is released and that is expected to show an uptick to 48 from a previous reading of 46.4.
Of course the Big Kahuna of economic reports is released on Friday before the market opens and that is the August unemployment report. As I have been saying for several weeks, volume is typically benign heading into Labor Day, but this Friday should be different. If nothing else, there should be some volatility early in the session. The range of estimates is uncomfortably wide with some experts saying there could be positive job growth while some think as many as 350,000 jobs were shed by U.S. employers in August. The consensus estimate calls for 225,000 lost jobs and while not good, that would be better than the 247,000 jobs lost in July.
Looking at the charts, Monday's decline brought the Dow within sniffing distance of support at 9475. The index bumped up against resistance at 9625 a couple of times last week and was beaten back. There is probably some resistance at 9655 as well, so that is another potential stumbling block on the way to 10,000. If 9400 is broken, 9275 should be the next support area. Hopefully 9275 will not come into play this week, or at all.
The S&P 500 did not have much of a range on Monday, less than 11 points and 1030 is now looking like a resistance point, at least from an intraday perspective. Buyers have done an admirable job of bidding the S&P 500 up almost every time the index reaches an important support level and continuation of that trend is imperative to get the index to 1050 and then 1100, though the latter might be a tough road to travel in September.
S&P 500 Chart
I mentioned a couple of weeks ago that the Nasdaq's leadership of the rally might be in jeopardy as earnings season drew to a close, but plenty of catalysts emerged on Friday to help the Nasdaq traverse 2030. Surprise guidance from Intel (INTC), a solid earnings report from Dell (DELL) and news that Apple's (AAPL) iPhone will finally make its way to China helped the Nasdaq scoot higher, but the gains were tempered by a late-day sell-off.
With Monday's glum performance, support seems firmly in place at 2000 and resistance looms at 2037 and then 2063, which would be a 50% rebound off the March low.
With plenty of economic reports looming, Monday's losses could be erased in a heartbeat if those reports meet or exceed expectations. The other side of the coin is traders may take a pass on the week and leave early to enjoy the long weekend. Tuesday will be important not only because it is the first day of September, but also because it may serve to prove or discredit the ''buy the dips'' phenomenon that has carried the market higher this summer. A break in that trend could indicate this September may follow a majority of Septembers past.