All those clunkers that were littering car dealers' lots are now temporarily clunking up economic data.
That will be apparent in Tuesday's monthly auto sales, when automakers show temporary outsized gains in August from sales related to the clunkers program. It will also be somewhat apparent as a blip in the Institute of Supply Management manufacturing survey, released at 10 am New York time.
Economists expect the ISM to rise above 50 for the first time in 19 months. A reading over 50 indicates the economy is growing.
Tuesday is also the first trading day of September, a month that haunts traders due to its historic bearishness. On average, the Dow has declined 1.2 percent in September. In years when August was a positive month, the Dow lost an even bigger 2.1 percent. The Dow has been up 41 percent of the time in September, and when it's up, it averaged gains of 3.8 percent.
Both the S&P 500 and Dow closed out August with roughly 3.5 percent gains, their best August performance in nine years. Stocks were lower Monday, after a 6.7 percent drop in Shanghai stocks pressured stock markets around the globe. The Dow shook off its worst losses of day and was down just 47 at 9,496, and the S&P 500 was off 8 at 1,020.
Bonds saw buyers along the curve, and in an unusual move, the dollar moved lower in tandem with commodities and stocks. It typically moves counter risk assets.
What to Watch
Other data Tuesday includes pending home sales and construction spending, also released at 10 am, but the big focus is on ISM.
A small amount of the improvement in ISM is expected to come from the activity around the spike in auto sales, related to the government's "cash for clunkers" program. Under that program, consumers received a cash incentive to turn in old cars when they purchased some 690,000 new, more fuel-efficient models.
The seasonally adjusted annual rate of auto sales for August is expected to be about 14.3 million, the best rate since April 2008.
Economists had forecast a pickup in auto manufacturing, even without the clunkers program. They also have been watching the early stirrings of a manufacturing recovery to see if it can help lift the rest of the economy.
"The ISM is about good old-fashioned inventory restocking," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. "The clunkers is maybe worth half a point. This is really about inventory restocking."
LaVorgna expects ISM to come in at 52, revised form his earlier forecast of 51. Last month, the reading was 48.9.
"The clunkers aren't going to impact whether you're bullish or bearish," he said.
ISM hit a low of 32.9 in December, 2008. LaVorgna said a primary driver behind the improvement is the increased activity, following the restructuring of GM and Chrysler earlier in the year.
Markets Mayhem - Time for Caution
Standard and Poor's said in a note that the S&P 500 , in the last year, had its best six months since the 1930s, following its worst six months since the 1930s. The S&P has gained 38.8 percent for the six months ending Monday, its best six months since the 44 percent gain in September, 1938.
The prior six months, down 42.7 percent, were the worst since the 45.4 percent decline in the six months January through June, 1932.
The market's behavior recently is timid compared to the volatility behind those historic moves. But plenty of strategists see things changing soon.
Jeffrey Saut, chief investment strategist with Raymond James, flagged a buying opportunity in early March, but now he has gotten cautious.
"I've gotten cautious lately because of a melt up and a buying stampede," he said. Saut said this is the case even with the summer's low volume trading days.
"You can actually make an argument that low volume is actually a positive thing because people don't believe it ... That's why the pull backs have been very limited in there," he said. "A lot of hedge funds and mutual funds close their books at the end of October ... If they are underperforming and underinvested, they have bonus risk and they have job risk. The pressure on an underperforming portfolio manager now is pretty intense."
Saut said he is not bearish, just cautious.
"I think the real secret is not giving back the money you've made. You have to be a lot more careful here because we are subject to anywhere between a 10 and 15 percent pull back," he said.
Saut said he believes stocks will be higher at year end, but it is currently stretched by high valuations.
"Over 93 percent of the S&P 500 are above their 50-day moving averages. That 's just telling you things are pretty overbought," he said. Stocks were last at that ratio about three years ago, he said.
Another negative factor for the market could be swine flu, if the news becomes very negative once flu season starts.
“I think worries about pandemic are probably overblown, but the difference between perception and reality is where investment opportunities lie," he said. Stocks that could benefit include AmerisourceBergen , which ht a 52-week high Monday, and CVS . He also expects Gilead, which makes Tami flu could see a benefit.
"Managed care companies could be negatively impacted if medical costs rise. Transportation companies, if this gets traction, are probably going to take a hit," he said. Cruise lines, bulk shippers and airlines could all be affected. He also said while a stretch, some technology companies, like Citrix, could be impacted if companies allow workers to stay home.
Scott Redler of T3Live.com follows the short-term technical moves of the stock market, and he believes the market has changed its tone in the last couple of sessions. He is now shorting the stock market.
Among the things he sees as problematic for stocks are the fact that the Shanghai market made a lower low. He also said it is a concern that the U.S. market is no longer rallying on good news, like the Intel revenue forecast last week and Monday's improvement in Chicago purchasing managers data. He also points to a increase in bullishness that is not healthy, as well as heavy trading and big moves in some of the lower quality financial stocks.
"It could be it's the last day of the month. It could be the light volume, or it is that the complexion is really changing. We think it's changing," said Redler. "I'm not looking for a retest of the lows, but I'm looking for a 5 to 10 percent sell off."
He said if it moves lower, the S&P 500 should find a minor level of support at 1008 and a first real test at 976.
Boris Schlossberg of GFT Forex said the dollar's move lower may have been the result of a bit of a short squeeze in the euro Monday afternoon. The euro was at $1.4337 late Monday. He said the currency market is focused on German data, as well as U.S. data Tuesday. German employment data and retail sales for July are reported.
"The second leg everybody's looking for is the strength of the consumer ... There's still not an insignificant chance that we could take out the highs of the euro and the recovery trade could have one last hoorah this week," he said. "I think what will surprise the market and possibly push the risk currencies higher is if they see some tangible sign the consumer in the euro zone is starting to spend money and tangible signs that the jobs data is better than they think."
"All of this is counterbalanced by the fact that the Shanghai index is just falling off a cliff. Either it doesn't matter and it's a financial correction, not an economic one ... or it's a precursor to much slower demand out of China going forward. That would impact not just commodities but commodities economies ... China made them and China can break them," he said.
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