Market Stats

Better than expected manufacturing data from the Chinese PMI released last night and the ISM report this morning sparked a short-covering rally in stocks. The U.S. market surged from oversold levels to the best gain in months following the worst August in nine years, which saw the S&P 500 lose -4.7%. The better than expected reports overshadowed a drop in construction spending and dismal August car sales. Meanwhile tech giant Apple (AAPL) made headlines with several improvements on some of the company's the best selling items.

Asian markets were mixed. The big event overseas was the Chinese PMI data coming in stronger than expected. Economists were looking for the August purchasing managers' index to rise from 51.2 in July to 51.5. The manufacturing index rose to 51.7, but this may have been influenced by seasonal changes as factories gear up again following mid-summer maintenance. Australia had a positive influence on the Asian markets today. Sydney's Bureau of Statistics said Q2 GDP growth was fueled by better than expected consumer spending. The country saw GDP grow +1.2%, better than the +0.9% estimate. Meanwhile Japan's NIKKEI index rallied +1.1% thanks to a bounce in the dollar against the yen. The NIKKEI dipped under the 8800 level this morning, hitting a 16-month low before bouncing back into positive territory. The Chinese Shanghai lost -0.6%. The Hong Kong Hang Seng gained +0.43%.

In Europe the various stock markets completely ignored news that Germany's retail sales slipped for the second month in a row. July's retail sales dropped -0.3% when analysts were expecting +0.5% gain. The stronger manufacturing data from China and U.S. fueled big gains across the region. England's market saw an extra boost from M&A talk. The English FTSE rallied +2.8%. The German DAX gained +2.68%. The French CAC-40 soared +3.8%.

The manufacturing data this morning temporarily relieved fears that the global economy was slowing down too fast. Now add in a weak U.S. dollar and it was a strong day for commodities. Copper is a key element in manufacturing and copper prices rallied +3.15%. Crude oil futures, after a -9% drop in August, soared +2.9% on Wednesday, ignoring the bearish inventory data this morning. The EIA reported that inventories rose +3.4 million barrels, which is above the +1.9 million estimate. Some of the agriculture commodities performed well with coffee prices up +2.1%, sugar up +3.75%, and wheat rising +3.3%. Gold futures edged lower with a -$3.40 decline to $1,246.90/oz.

The stock market rally sucked money out of the bond market and yields rallied as a result. The 10-year U.S. bond yield climbed from 2.47% yesterday to 2.58% today. Speaking of the bond market a Bank of America analyst expects that yields will drop to an all-time low of 2% in less than a year. The Federal Reserve's decision to start buying treasuries again will lift the bond market and drag yields to new lows.

Naturally the major headline today was the ISM data. Economists were expecting the national ISM to show a drop from 55.5 in July to 52.8. Yet the Institute for Supply Management reported that their manufacturing activity index rose to 56.3 in August. Readings over 50.0 indicate growth and expansion and August was the 13th month in a row this report has been positive. There is some hope that stronger data from the manufacturing sector will translate into a positive influence on the jobs market. However, readers should keep in mind that the manufacturing sector is only 11% of the U.S. economy.

The better than expected ISM data overshadowed news on construction spending, mortgage applications, and auto sales. The Commerce Department said construction spending fell -1.0% in July to the lowest level in ten years. June's previously estimated gain was revised lower to a -0.8% drop. On a more positive note the Mortgage Bankers Association said their mortgage applications index rose +2.7% last week. Both refinance applications and new purchases improved and together they marked the fifth weekly rise in a row for applications thanks to record-low mortgage rates. The average interest rate on a 30-year fixed mortgage is 4.43%.

Auto sales were not so encouraging. Nervous consumers are not buying new cars with unemployment hovering near 10%. August is normally a strong month for auto sales but this year sales vanished marking the worst August in almost 30 years. Month to month sales were bad but year over year they were terrible since summer 2009 was driven by the government's "cash for clunkers" rebate program. General Motors said August sales dropped -7% from July but -25% from a year ago. Ford (F) said sales dropped -5% from July and -11% from August 2009. Toyota saw a -12% drop from July and -34% from a year ago. Nissan's sales dropped -7% from July and -27% from August 2009. Honda Motor Co. said August sales slowed -3% but fell -33% from a year ago.

It must have been too warm in San Francisco today. Steve Jobs ditched his trademark black mock turtleneck while presenting the latest round of gadgets from Apple Inc. (AAPL). The company unveiled improvements for their Apple TV system, iPod touch, iPod nano, and iPod shuffle. The newest iPod touch will have a camera and video-chat features similar to the iPhone. The latest iPod nano will have a touch screen. The new Apple TV system is smaller and cheaper (at $99) and lets consumers download movies and high-definition TV shows from the Internet. Most of the buzz centered on the Apple TV system, which will allow users to download TV shows for 99 cents and movies the same day they hit rental stores for $4.99. Netflix subscribers will also be able to download movies to their TVs via the new Apple system. Shares of AAPL ended the day up +2.9% at $250 a share. NFLX soared +7.4% to $135 a share.

One of the best performers today was Burger King (BKC). The stock spiked higher and settled with a +14.6% gain near $18.85 a share following news the company was in talks to go private with 3G Capital. The 56-year old company went public back in May 2006 at $17 and the last couple of years have been rough for shareholders. The stock has been consistently underperforming its rival McDonald's (MCD) the last few months.

Technically the market is bouncing from oversold conditions near significant support levels. The rally today could have been exacerbated by beginning of the month inflows to mutual funds. We could easily see this bounce continue for a few more days but that depends on how the market chooses to interpret the jobs data this Friday. The S&P 500 has been bouncing from support near the 1040 level and after failing to breakdown over the past few days traders decided to cover on the stronger manufacturing news. What worries me is the lack of volume behind this move but that doesn't mean the rally can't continue.

Currently the S&P 500 index is testing resistance near 1080 and its simple 50-dma. Should the rally continue we can expect resistance at 1100 and then in the 1130 region (early August highs). There is also potential technical resistance with the 100-dma near 1108 and the 200-dma near 1115. If you're feeling optimistic then the S&P 500 could still be working on an inverse (bullish version) head-and-shoulders pattern. A strong close over the 1130 level would suggest a bullish target of 1,240 but I suspect the 1220 level remains very significant resistance. Let's pretend for a moment that the jobs number disappoints and stocks reverse lower again. The S&P will probably break support near 1040 but the 1010-1000 zone could be decent support. A drop under 1,000 could portend a longer decline toward the 950 area.

Chart of the S&P 500 index:

2nd Chart of the S&P 500 index:

The NASDAQ Composite delivered a very strong move with a gap open higher and a +2.9% gain. The tech-heavy index has broken out of the 2100-2150 trading range. It certainly looks like the NASDAQ is poised to rally further but watch for resistance near 2200, 2250, and the 2300 area. The index could also see trouble at the 50-dma and 200-dma. Broken resistance near 2150 should offer some short-term support.

Chart of the NASDAQ index:

Aggressive traders may want to pay more attention to the small cap Russell 2000 index. Not only did the $RUT outperform its large-cap peers with a +3.8% gain today but the $RUT appears to be building on a bullish double bottom pattern. The 50-dma might offer some resistance but I wouldn't be surprised to see this rally hit the 640 area.

Chart of the Russell 2000 index:

I would also keep an eye on the Dow Jones Transportation index, which just rallied past resistance near its 50 and 200-dma. Broken resistance near 4200 should offer some short-term support for the transports. Keep an eye on the SOX semiconductor index. The trend is down but the semiconductors are very oversold and poised for a rebound. Look for resistance in the 325-330 zone. I would also keep an eye on the banking indices. These were poor performers in August with both the BIX and BKX sinking to new relative lows. On a very short-term basis this group looks ready to bounce further but I would expect the rebound to run out of steam.

Looking ahead we have the pending home sales, Kansas Fed manufacturing survey, retail same-store sales figures and the weekly initial jobless claims data all coming out tomorrow (Thursday). The pending home sales data will likely be bad and the retail data could disappoint since early reports on back to school shopping were not very encouraging. The Kansas Fed could go either way. Sadly the jobless numbers have been getting worse as the four-week moving average starts to march closer toward 500,000 new jobless a week. Today's ADP employment report was another disturbing look at the job market. ADP only counts job growth at private companies and their August employment report was a disappointment with -10,000 jobs instead of the +15,000 analysts were expecting. Together, the rising trend in weekly jobless claims and the ADP number today does not bode well for Friday's non-farm payroll number. Economists are expecting the jobs data to show a drop of -120,000 jobs in August but that number will be tainted by the last round of terminations for temporary census workers. The real number to watch is the private sector employment. Wall Street expects a drop of private sector jobs from +71,000 in July to +41,000 in August. Anything worse than that could spell serious trouble for the stock market.

Short-term traders can try and take advantage of the market's swings, especially when the indices are trading so closely off obvious support and resistance levels. However, I am suggesting readers stay cautious. Bank of America's New York office came out with some discouraging figures on U.S. growth. The firm now expects U.S. GDP growth for the rest of 2010 to fall toward +1.65% and they're projecting 2011 growth to decline to +1.8%. I suspect we will see more and more analysts lowering their growth expectations for the U.S. soon. The stock market could choose to interpret today's numbers in two ways. You could argue that +1.6% is a whole lot better than a double-dip recession and investors could focus on the fact we're still growing, albeit slowly. Or there is the risk that investors choose to react negatively to growth estimate downgrades and argue that stocks may be priced too high for these lowered expectations.

Lastly, readers on the east coast better grab their rain jackets. Category four Hurricane Earl, the biggest storm in U.S. waters this year, is not expected to make landfall on U.S. soil but it will pass close enough that residents from South Carolina to Massachusetts will feel the storm's influence. The weather service has already recorded 50 foot waves out in the Atlantic and there is a chance that the storm path veers closer to the coast than expected. If Hurricane Earl misses us it will soon be followed up by Tropical Storm Fiona.

-James