Both the Dow and the S&P 500 sold off Monday after a sharp drop in China’s stock market left investors worried that asset prices had raced ahead of an economic recovery.
China's key stock index dived 6.74 percent on Monday to a three-month closing low and recorded its second-biggest monthly loss in 15 years.
Here in the U,S. the sharp sell-off dragged down industrial and natural resource companies as commodities prices slumped.
Is the September correction already underway?
Instant Insights with the Fast Money traders
I think we’re at an inflection point in the market, says Fast Money trader Joe Terranova. We have ISM and employment numbers coming this week and that will be a “tell.” If we get good numbers and the market does not rally, that will say to me we’re looking at a correction.
I get the narrative, but don’t forget that China is an immature market and an inefficient market, counters Zach Karabell of RiverTwice. It’s uncorrelated to the major markets of the world. I wouldn’t trade in the US based on what happens in China.
There can be no functional relationship between the US and China, adds Mike Khouw of Cantor Fitzgerald. There may be a bubble in China but there’s no way for the market mechanism to correct for it.
But it’s important to remember that markets are psychologically linked too, so it’s very hard for American investors to come into the office -- see China down -- and not sell, counters Dennis Gartman, author of The Gartman Letter. That’s important to remember because I wouldn’t be terribly surprised to see more down days in China.
OIL SLIDES BELOW $70
Weakness in China as well as a stronger dollarknocked down the price of crude below $70 a barrel on Monday.
"It's negative sentiment given the very weak Chinese market," says Eugen Weinberg, analyst at Commerzbank. "This is definitely bad news for the commodities sector, especially oil and metals."
What’s the trade?
I wouldn’t go short but the tape is telling me to go to the sidelines, says Joe Terranova.
But for the long term I’m still bullish energy, adds Mike Khouw.
MORGAN STANLEY LEADS FINANCIALS LOWER
The XLF was also trading lower on Monday after Banc of America-Merrill Lynch cut its rating on the stock of Morgan Stanley to "neutral" from "buy." The stock is no longer deeply undervalued, said research analyst Guy Moszkowski in a note to clients.
Also Barron's said AIG shares were overpriced after soaring more than 50 percent last week; they also recommended investors take profits in Citigroup .
What’s the trade?
Trading volumes at online brokers have absolutely exploded, explains Jon Najarian. I think those brokers are great plays.
Charles Schwab seems like a big beneficiary of the fall out, adds Zach Karabell.
TRADE TO GO: WATCH 'BEST IN BREED'
If the S&P futures break below 1010 I'd be a seller of breed stocks such as Goldman , AppleGoogle , Potash and more, counsels Joe Terranova.
CALL THE CLOSE
Joe Terranova: I’m a seller.
Jon Najarian: I’m a buyer into the close
Zach Karabell: In general I’m long biased although I've been playing the SDS.
Mike Khouw: Options investors have been making targeted purchases and sales. I’d follow that trend.
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Trader disclosure: On Aug 31st, 2009, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Adami Owns (AGU), (C), (GS), (INTC), (MSFT), (NUE), (BTU); Terranova Owns (AMZN), (FCX), (JPM), (SU), (WFT); Terranova Is Short (SHLD); Terranova Is Short (ESS); Terranova Owns (CCL) Puts; Terranova Works For (VRTS); Finerman Owns (PDE); Finerman Owns (RIG); Finerman's Firm Owns (BAC) Preferred Shares, Finerman Owns (BAC) Preferred Shares And Owns (BAC); Finerman's Firm Owns (WFC) Preferred Shares And Is Short (WFC), Finerman Owns (WFC) Preferred Shares ; Finerman's Firm Owns (MSFT), (NOK), (WMT), (PBR), (PDE), (RIG), (TBT); Finerman's Firm Is Short (USO), (IYR), (IJR), (MDY), (IWM); Najarian Owns (BAC) & Short (BAC) Calls ; Najarian Owns (BUCY) & Short (BUCY) Calls; Najarian Owns (HGSI) Call Spread; Najarian Owns (FCX), Owns (FCX) Put, Is Short (FCX) Calls; Najarian Owns (JPM) & Is Short (JPM) Calls ; Najarian Owns (MS) And Is Short (MS) Call; Najarian Owns (MSFT) And Is Short (MSFT) Call; Najarian Owns (PALM) Calls; Najarian Owns (TXT) Call Spread; Najarian Owns (TEVA) Calls; Najarian Owns (C) & Short (V) Calls; Najarian Owns (WFT) Call Spread; Najarian Owns (YHOO) Call Spread; Najarian Owns (ETFC) Calls
CNBC.com with wires