Stocks are enjoying a widespread relief rally on Tuesday after last week's sell-off. Disappointing economic data out of China has ignited new hopes that the Chinese government will continue to add to their stimulus measures to rejuvenate their economy. The Chinese market dropped sharply on Monday and continued to fall this morning. Earlier today the Shanghai index was down -2.3%. Then suddenly it reversed higher and delivered a huge bounce to close up +2.9% on the session. This fueled gains around the globe. Most of Europe's stock markets were up +1.0-1.5%. As of Tuesday afternoon the major U.S. indices were all up +2.0% or more.

It is a nice change of pace after last week's stock market sell-off. It was the second worst weekly performance of the year. The Chinese market was closed on Thursday and Friday last week for holiday and the U.S. market was closed yesterday. Traders were selling ahead of the long weekend for fear the market would collapse on Tuesday morning. Most of the U.S. indices fell -2% to -3% last week with a few dropping closer to -4%. Thus far today's market rally has erased a good chunk of last week's decline.

Economic Data

Looking back at last week's economic data, most of it was weaker than expected. Construction spending seemed to be the exception with a +0.7% rise in July while June was revised higher from +0.1% to +0.7%. The Chicago Purchasing Managers Index (PMI) for August slipped from 54.7 in July down to 54.4 in August. It was not a big move and still above the key 50.0 level.

Factory orders for July were only up +0.4% after June's was revised higher from +1.8% to +2.2%. The ISM manufacturing index slipped from 52.7 to 51.1 in August. The ISM non-manufacturing (services) index fell from 60.3 to 59.0 in August. Numbers above 50.0 suggest economic growth.

Employment data came in below expectations. The ADP National Employment Report said private businesses added 190,000 new jobs. Meanwhile the government's BLS announced that nonfarm payrolls for August rose +173,000. The average nonfarm payroll estimate was +215,000. Bloomberg's economist poll had a range of +130K to +253K.

The August jobs report was disappointing but everyone noted how August results tend to be revised higher. In the last 27 years the August jobs report was revised higher 21 times. Thus while the initial headline was discouraging the market expects a revision and this only increased uncertainty over the Fed's decision on a rate hike next week.

Another disappointing fact was another 261,000 workers dropped out of the U.S. workforce. The labor force participation rate has fallen to 62.6%, the lowest level since 1977. Over 94 million Americans are no longer in the workforce (FYI: current estimates put the U.S. population at 319 million).

Overseas Economic Data

China has been a major market influence lately as analysts worry over the country's slowing economy. Last week saw the official manufacturing PMI reading fall from 50.0 to 49.7. The Caixin manufacturing PMI inched higher from 47.2 to 47.3. Unfortunately, both of these readings are under 50.0 and suggest economic contraction. Analysts have been reducing their forecasts on Chinese growth and last week Goldman Sachs added their two cents. Goldman downgraded their outlook on Chinese growth for 2016, 2017, and 2018 with expectations for growth to slow to +6.4%, +6.1%, and +5.8%, respectively.

Economic data out of Japan was mixed. Their NIKKEI services PMI for August did improve from 51.2 to 53.7 but their manufacturing PMI slipped from 51.9 to 51.7. Japan's industrial production for July fell -0.6%.

Looking to Europe the area is still struggling with deflation. The European Central Bank left their monetary policy unchanged. The ECB suggested they were ready to increase their QE program if necessary. Unfortunately inflation continues to sink. The July PPI for the Eurozone fell -0.1% for the month and is down -2.1% for the year. Eurozone manufacturing PMI for August was down slightly to 52.3. Services PMI inched higher to 54.4. The region's unemployment rate improved from 11.1% to 10.9% while their retail sales in July improved +0.4% for the month.

Major Indices:

It was an ugly week for the S&P 500 index. Looking at last week's performance, the index plunged on Tuesday, September 1st. The midweek bounce failed with stocks sinking again into the weekend. All told the S&P 500 lost -3.4% for the week and as of Friday's closing bell it was down -6.7% year to date.

The short-term levels to watch are support near 1,900 and 1,865. The 2,000 level is overhead resistance.

Daily chart of the S&P 500 index:

Intraday chart of the S&P 500 index:

The NASDAQ fared a little bit better with a -3% decline last week. The key levels to watch for support appears to be 4,600 and 4,500. Overhead resistance looks like 4,800 and 4,900, which will be bolstered by the simple 200-dma. As of Friday's closing bell the NASDAQ was down -1.1% year to date.

chart of the NASDAQ Composite index:

Intraday chart of the NASDAQ Composite index:

The small cap Russell 2000 index held up better than its big cap rivals. Last week the $RUT only lost -2.3% thanks to a big bounce on Wednesday. As of Friday's close the $RUT was down -5.6% year to date.

The 1,100 and 1,120 levels look like short-term support. I'd watch 1,160 and 1,180 as short-term resistance.

chart of the Russell 2000 index

Intraday chart of the Russell 2000 index

Economic Data & Event Calendar

It's a relatively quiet week for economic data. The U.S. markets were closed on Monday for the Labor Day holiday. There is nothing on the schedule that looks like a market-moving event.

Apple Inc. (AAPL) will make headlines with its special event on Wednesday. The company is expected to unveil its newest iPhones the 6S and 6S plus in addition to a new iPad and possibly a new Apple TV set-top box.

The Bank of England will likely leave rates unchanged at 0.5% and its QE program at 375 billion pounds.

Meanwhile the U.S. Senate and House of Representatives return to Washington following a summer recess. On Wednesday, European Commission President Jean-Claude Juncker gives his first State of the Union speech to the European Parliament. Chancellor Angela Merkel speaks to the German parliament and could talk about the Greek situation and the immigrant crisis in Europe.

- Monday, September 07 -
U.S. Markets closed for Labor Day holiday

- Tuesday, September 08 -
...nothing significant...

- Wednesday, September 09 -
Apple Inc. (AAPL) holding a special event

- Thursday, September 10 -
Chinese auto sales numbers for August
Bank of England interest rate decision
Import/Export data
Wholesale inventory data

- Friday, September 11 -
Producer Price Index (PPI) for August
University of Michigan Consumer Sentiment
14th anniversary of the Sept. 11th attacks

Additional dates to be aware of:

Sept. 17th - FOMC meeting, policy update, economic forecasts
Sept. 17th - Fed Chairman Yellen press conference
Oct. 28th - FOMC meeting

Looking Ahead:

The market's correction has been sharp enough that stocks might be (I repeat, might be) near a bottom if the recent IIS survey is any indication.

The Investor Intelligence Survey polls stock market newsletter editors for their opinion of the market. After last week's market drop the survey showed editors were very pessimistic. The number of bullish replies hit lows not seen since March 2009, which was the bear-market low. Contrarian investors see this data point as a bullish signal.

On the Investors Intelligence website, "The Advisors' Sentiment Report... heralding major market moves since 1963 - This survey has been widely adopted by the investment community as a contrarian indicator and is followed closely by the financial media. Since its inception in 1963, our indicator has a consistent record for predicting the major market turning points."

Earlier this week analysts at Deutsche Bank commented on the market and the possibility of a fed hike. In a note they said, "The post-Labor Day outlook, with nine days to the September FOMC, remains remarkably uncertain. Volatility levels, ISM momentum and inflation expectations would point toward easing, not tightening." It would seem that Deutsche Bank has joined the camp of no rate hike in September.

At the moment investors should probably stay neutral on the market. Obviously today's big bounce is encouraging but it's just a bounce. Stocks are likely to remain volatile until the Fed's FOMC meeting next week on Sept. 16-17th. The Fed's decision and their commentary on why they made their decision, Thursday, the 17th, will have a huge impact on market direction. It could spark a big move higher or lower.

~ James

Fun fact:
This week, Queen Elizabeth II, on the throne since 1952, becomes the longest-serving monarch in British history, passing the record set by Queen Victoria, who reigned from 1837 to 1901. (source: Bloomberg)