September, the worst month of the year for the stock market, showed up for work this morning with a bad attitude and a chip on it's shoulder.

Market Stats Table

You would have thought today would have been a strong day for the bulls with blowout economic results. It appeared on the surface there were a lot of traders ready to sell on the news rather than buy the breakout. Appearances can be deceiving.

The morning opened with the ISM Manufacturing Index for August coming in at 52.9 and well over the consensus estimate for a rise to only 50.5. This was a strong gain from the 48.9 posted in July and the first time in expansion territory since January 2008 and the highest level since July 2007. This was 10.3 points above its average for Q2.

The internals were very strong with new orders spiking nearly 10 points to 64.9 from 55.3 and production rose to 61.9 from 57.9. Even exports rose to 55.5 from 50.5. This was a strong report that should have had the bulls cheering. Since the December low of 32.9 the ISM headline number has risen +20 points and the trend is accelerating.

However, a lot of the increase came from the restart of automobile production so a lot of the gains came from the auto sector. The employment component rose to 46.4 fro 45.6 and that minor gain suggests the Friday Non-Farm Payrolls may not be as good as some had hoped.

ISM Chart for August

Another bullish report was the Pending Home Sales for July. This is a lagging report but it did show an increase of +3.2% from June. This is up +12% over the same period in 2008. It was also the highest level since June 2007. The biggest gains came from the western region where contract signings rose +12.1% for the month. The current six-month string of gains is the longest string since the index was created in 2001. Existing home sales rose +7.2% and the largest monthly increase on record.

The flood of cheap homes in foreclosure and the first time buyer credits are producing a boom in existing home sales. The National Association of Realtors said two million first time buyers have bought homes this year and 350,000 of those would not have purchased a home without the tax credit. They estimate one third of the July sales were first timers.

That FTHB stimulus program expires in November and NAR believes sales will fall dramatically for the rest of the winter before picking up again in the spring. As with any stimulus rebate program the majority of sales are pulled forward from future months in order to take advantage of the program. Once the program ends the future months are devoid of activity. We are already seeing this in auto sales now that the cash for clunkers program has ended. Dealers are reporting sharply reduced traffic and sales.

Construction Spending declined -0.2% for July but this report was ignored given the better news in the ISM and Pending Home Sales. Weekly Chain Store Sales fell -0.5% as the back to school shopping season passes.

Auto sales for August spiked to 14.0 million units on an annualized basis. This was the highest pace of sales since May 2008. Cars made up 57% of sales and the highest percentage since 1996. Obviously this was a clear result of the cash for clunkers program. Japanese automakers benefited the most from the C-F-C program with 39% of all vehicle sales and the highest on record. Reportedly there were 625,000 cars purchased under the C-F-C program. Annualizing that and applying a seasonal adjustment shows that 6.8 million of the 14.0 million headline number was related to the C-F-C program. That means that September is going to be extremely poor for sales as those 6.8 million annualized sales are removed.

If the economics were so good why did the market sell off? The drop was led by the financials with the fab-4 taking a serious hit. By the fab-4 I am referring to AIG, C, FRE and FNM. These overbought financials had been the favorites of the day traders with volume in those four exceeding 1.5 billion per day in total. I get emails daily asking me why those stocks are going up so dramatically. It is just another bubble that defies explanation.

This morning Sanford Bernstein downgraded AIG to an underperform. That is a polite way to say sell. The reminded everyone that their price target is still $10 because there is no plan on the table to pay back the $80 billion in Federal loans. The company may have avoided bankruptcy but they are just a shell of their former self. AIG had risen to $55 last week on short covering after the reverse stock split and AIG lost -9.33 (-21%) today alone to close at $36. With a $10 price target and day traders fleeing the stock now that it trades for more than a buck the outlook here is grim.

Citigroup (NYSE:C) has also taken it on the chin. Citi traded as high as $5.43 last week and closed at $4.54 today on volume of 1.26 BILLION shares. Various print articles today compared Citi with AIG and the similar risk of devaluation because of the monster government loans. The articles also compared the lack of any meaningful business plan to pay off those loans and return to profitability. Citi had been moving higher on hopes of a reverse stock split like AIG and day traders had been hyping the potential at every turn. If Citi does a 1:20 reverse split like AIG it may get a big pop as the shorts cover but the board is just going to dump another $20-$30 billion of government loans and preferred share conversions back into the common and the dilution will be ugly. I said a month ago that I thought Citi was dead money. Since then John Paulson bought a 2% stake and the stock has nearly doubled. I have not changed my view and the jury is still out on whether Paulson made a good deal or a deal with the devil.

Fannie and Freddie (FNM/FRE), both up +200% in August, are prime candidates for a decline. There is not likely to be a reverse stock split because the government owns them and the stock is worthless despite the August spike. There have been numerous articles on why the SEC should stop trading in FRE/FNM because the stock has no inherent value as a public corporation. The parents are hundreds of billions in debt to the government and in fact have become wards of the state. This is a case like GM where the stock continued to trade on rumor despite the bankruptcy and the eradication of shareholder equity. The SEC repeatedly warned traders the stock had no value. Today FRE/FNM are simply day trading vehicles and they have no relation to the value of the companies. FNM/FRE both lost -17% today.

EBAY rallied to a new 52-week high at $23.18 this morning but ended the day with a loss after they announced they sold 65% of Skype for $1.9 billion to a group of private investors. Ebay paid $3.1 billion for Skype in 2005. Skype never lived up to Ebay expectations despite increasing users in 2008 by 47% to 405 million and seeing revenue increase +44% to $551 million. By selling Skype it frees the company and the new management to make a name for itself away from Ebay.

It also suggests Ebay may want to spin off PayPal to enable that company to expand its growth. As a part of Ebay it has a stigma attached that prevents some online retailers from using it for fear of customers somehow migrating to Ebay. PayPal processed over $60 billion in transactions in 2008 and they collect about 3-4% in charges for each transaction. It has grown to the largest payment processor other than MC/V on the Internet. The ecommerce market is expected to grow by 33% to $1 trillion in 2011 and PayPal will capture a large portion of that pie. If they were separate from Ebay they could capture a lot more. I would buy that IPO.

Google's new browser Chrome will be installed on new Sony Vaio laptops. Sony said user acceptance of the browser has been outstanding and they are going to make it available to more people. Google controls 67.5% of the search market with 76.7 billion searches on Google in July. According to ComScore there were 113 billion searches in July. Yahoo received 19.3% share, Microsoft 8.9%, Ask.com 3.9% and AOL 3.1%. Google suffered some downtime today with the majority of Gmail users unable to access their accounts all day. A message on Google's website gave no reason for the outage but said they hoped to have it fixed by Tuesday evening.

Bank America may be close to paying back $20 billion of the $45 billion in TARP loans. The $20 billion it is planning on returning to the government is the $20 billion the government gave them to ease the takeover of Merrill Lynch. Ken Lewis has repeatedly said they could pay back all the $45 billion at any time but were waiting for some government conditions to be fulfilled. Bank America has some significant loan exposure from its takeover of Countrywide and I suspect the government regulators would like them to keep the $45 billion to prevent backsliding if foreclosures increase. Wells Fargo also made comments about paying off the TARP soon but the stock still lost -5%.

Bank America Chart

Petrochina (PTR) announced it was acquiring a major 60% stake in two oil sand projects in Canada for $1.7 billion. The agreement with Athabasca Oil Sands Corp will give China a 60% working interest in the MacKay River and Dover projects in northern Alberta. Reportedly there are about 5 billion barrels of recoverable reserves and peak production from the two sites is expected to reach 300,000-500,000 bpd with first production in 2014. As part of the deal PetroChina has agreed to provide up to $20 billion in financing for the projects. Sinopec (SNP) recently bought 10% of a Total (TOT) project and CNOOC (CEO) bought 17% of a privately owned oil sands project.

I wrote about the commodity ETFs on Sunday and they are still making news today. Deutsche Bank announced this afternoon they are going to close the Crude Oil Double Long ETN (DXO). DB said the limitations imposed by the exchange have resulted in a "regulatory event" and DB will redeem all the shares. They are going to provide notice of the redemption on Sept 9th. However, just announcing they are going to close the ETF pushed it lower in after hours. I hope everyone long this ETF took my advice over the weekend to add a tight stop in case of a decision by regulators to limit positions. I would avoid any other commodity ETFs now that the dominos have started to fall. Wait until after the fire sale and see what is left on the market.

The bears came out of their caves today and made a nuisance of themselves on stock TV. Nearly every person interviewed was predicting a September to remember. The six month rally from the March lows was the third strongest on record. According to the bears that sets up September for a major decline. Citing historical precedents when August produced strong gains those gains normally were followed by strong losses. Today concluded the biggest 4-day decline in two months.

Doug Kass was on CNBC touting his market topped call again and talking about a 10% decline or more. The interviewer was sharp enough to ask him in the closing segment if he was short already to which he replied strongly yes. "Then you are talking your own book?" Gotcha!

The banks were the loss leaders today but they had been telegraphing weakness for the last three weeks. Even with the -5% loss in the banking sector the banking index failed to return to decent support at $44 from early August. It is only profit taking until that support is broken then it will turn into a sell off.

Bank Index Chart

I don't believe today's selling was broad based. We saw the market open higher until the three major economic reports were released at 10:00 and then the bottom fell out. In the intraday chart below there was clearly a sell program from 10:30 to 11:30 and the rest of the day was sympathy selling. If you have a big long portfolio with no stops and the bottom falls out you tend to look for the first bounce to see if it is just temporary before you start liquidating. When the first bounce (green candle just past 11:30) failed to gain any traction the retail traders began to liquidate. You can see where some dip buyers tried to pick up some bargains several times for the rest of the day but the shock of the decline from the sell program had soured sentiment and there was not enough dip buyers to make any difference.

S&P Chart - 3 min

We have not seen a major sell program like this in months. About half way through it I started thinking about the Cerberus liquidation. There were some rumors in the market this morning that Cerberus was seeing liquidation in other funds and may be facing a default. Cerberus quickly dismissed speculation about a default but the rumors continued the rest of the day. Cerberus has $24.3 billion under management in a dozen funds and investors have requested withdrawal of $5 billion out of its two flagship funds. Cerberus said it was putting those assets in a special vehicle that will liquidate them and return investors money over the next four years. I still wondered if Cerberus needed to raise some fast cash and launched a sell program to do it.

This selling started in the banks and insurance companies but quickly broadened across all indexes. That is also a clear indication that it was an ETF or futures related sell program and NOT a retail event. You can't tank 5,000 stocks all at once with retail selling.

This could also be a case of "If its September then expect a decline." Everyone was lined up on in the back of the plane with their parachutes on and expecting a signal to bail out. When the sell program hit traders were already expecting to sell so everyone jumped in reaction to the sudden dip. The plane may survive the turbulence and continue on its way but the knee jerk traders are now in cash on the sidelines and wondering what happened.

The S&P failed exactly where it should have failed. I talked about the 1020 level as critical support in my weekend commentary and it broke dramatically. That brings up the 990 level as the next test but 980 is the next critical level. I would be a buyer for a trade on a rebound from either 990 and 980. I believe if 980 fails we could go a lot lower very quickly. S&P 944 has been mentioned many times as the ultimate target for any September decline.

S&P-500 Chart - 60 min

The Dow declined to 9316 by 11:30 and then traded in a 40-point range for the rest of the day just over 9300 with a close at 9310. I don't view 9300 as major support and should the selling take on a life of its own the next material support is 9200 and then 9000. The 9200 level would be just under a 5% decline from the highs and a decent level for buyers to return. If we do go to 9000, about a -7% drop that level must hold or the next stop could be 8600 and a full 10% correction.

Dow Chart - 60 min

I have been saying for a couple weeks that the Nasdaq scares me. In reality the good news coming from the chip and PC sector should be a bright light for investors but it can't seem to hold its gains. Just like a drunken sailor the Nasdaq has been running around and bumping into things with no apparent direction. The rally the third week of August rescued it from a potentially nasty fall but it has come right back and only a couple steps from the cliff once again. If support at 1965 and then 1930 fails it could be a very long drop to the bottom. And if September trading cycles return it could be a very sharp drop. I would like to think that investors will be focused on the guidance upgrades from Intel instead of peering over the cliff's edge into the abyss.

Nasdaq Chart - 90 Min

Russell 2000 Chart - 90 Min

The volume on Tuesday was huge at just over 12 billion shares with 11 billion of that in down volume. That qualifies as a 90% day and one that has been known to trigger reversals. The TRIN closed at a whopping 3.56 and also a reversal indicator. However, since it keys off volume we can't really claim it tonight.

It appears on the surface that traders entered September nursing a definite fear of heights. I want to believe that the sell program on Tuesday was a one time event but this is September and the month known for big declines. One thing for sure the bears are backing up the truck to fill up on shorts and a sudden change of heart could erase these four days of declines in a couple hours if the event was big enough to produce a decent short squeeze.

On Wednesday the big event is the FOMC minutes of the August meeting at 2:PM. There is also Factory Orders, Productivity and the Challenger Employment Report. The Challenger report is a prediction of the Friday Non-Farm Payrolls, which remains the key report for the week.

My last recommendation was to go short under SPX 1020 and look to buy a bounce at 1000 and 980. That 1000 level was tested today and the market on close orders forced a dip to close at 998. That is close enough to 1000 to warrant a trading buy on any move higher on Wednesday. However, if we move below that 1000 level the next key level is 980 and I would be waiting there for a potential bounce as well.

Jim Brown