Stocks could finish August on a cranky note Tuesday.
The market Monday failed to follow through on Friday's rally, and instead saw selling accelerate into the closing bell. The Dow lost 140 points or 1.5 percent to 10009, while the S&P 500 fell 15 points, or 1.5 percent to 1048. At the same time, buyers flocked to bonds, reversing some of Friday's losses in Treasurys.
Stocks traded on the lowest volume of the year, or about 3 billion shares -- 25 percent below the average August daily volume and 40 percent below recent normal volume.
The Dow is now down 4.4 percent for the month, and the S&P is down 4.8 percent. September historically is the worst performing month for stocks, with an average loss of 1 percent for the Dow and 0.7 percent for the S&P.
"The bulls had control coming into today. It was theirs to lose, and they had no power, no shots in the gun," said Scott Redler, a technical analyst with T3Live.com. "Goldman Sachs traded through Friday's lows. Bank of America traded new year lows. The banks gave us clues that Friday's reversal wasn't going to hold." The S&P financial sector was the worst performing major sector, down 2.2 percent Monday and down nearly 9 percent for the month.
"Friday's low of 1039 (on the S&P 500) will be the next point of reference. A daily close below that would open the door back to 1010," said Redler.
Traders and analysts have been looking to September as a month that promises to be volatile. Since 1929, whenever the Dow showed a loss for the year by the end of August, it ended the full year with a loss 81% of the time.
Jeff Kleintop of LPL Financial said, in an email, that he is looking for a decline, but he sees a rebound later in the year. "We raised 10 to 15 percent cash from stocks last week in anticipation of further downside and heightened risk in the coming weeks, until the catalysts come together for a late year rally," he said.
Analysts have been looking to the November election as one factor that may be a turning point for stocks because it will give more clarity to the political environment.
Septembers to Remember
Birinyi Associates crunched the numbers for September market performances following Augusts with similar levels of decline. They found that since 1928, there was a 50/50 split in direction in September after the weak August. What the September performances did have in common was that for the most part, there were big moves in either direction.
For instance in 2001, the 6.4 percent August decline in the S&P was followed by an 8.2 percent drop in September. The 5.7 percent drop in August, 1997 was followed by a 5.4 percent gain in September. The worst September drop after a down August was in 1937. That year, stocks lost 4.4 percent in August and 14.2 percent in September.
Traders though said Monday's sell off seemed overblown and was exaggerated by the thin trading volume. But there have also been concerns about the earnings power of companies. The fear that third quarter earnings estimates may be too high has increased after Intel's warning Friday that its revenues would be less than expected. Earnings worries also hit bank stocks Monday.
On Tuesday, FDIC Chair Sheila Bair holds a press conference to announce bank and thrift earnings for the second quarter at 10 a.m.
What to Watch
Tuesday's data includes S&P/Case-Shiller home prices at 9 a.m.; Chicago purchasing managers at 9:45 a.m. and consumer confidence at 10 a.m. The minutes of the Fed's Aug. 10 meeting are also released at 2 p.m.
Fed Chairman Ben Bernanke's speech before a gathering of central bankers and economists in Jackson Hole last Friday has probably taken the punch out of the minutes. It was after that meeting, that the Fed downgraded its outlook for the economy and initiated a trimmed down version of quantitative easing.
On Friday, Bernanke vowed the Fed would do what it takes to keep the recovery from faltering, including a possible return to a fuller program of quantitative easing. The theory is that if the Fed becomes a bigger buyer of Treasurys it can help drive down rates that would apply to things like commercial and consumer loans.
"We know what number one is thinking about, after Friday. It would be interesting to know what sort of conditions it would take for them to actually pull the trigger and restart quantitative easing. You never quite know what's in there (the minutes). You can try to judge how many members are in favor of that," said Christopher Rupkey, chief financial economist at Bank of Tokyo Mitsubishi.
The markets were spooked last week, ahead of Bernanke's speech, when the Wall Street Journal reported that seven of 17 Fed officials were against or had reservations about returning to quantitative easing. The Fed took a step towards a new QE program Aug. 10, when it said it would purchase Treasurys with the proceeds of its maturing mortgage securities, basically keeping its balance sheet stable.
Rupkey said he's watching consumer confidence as well. "It's a big market factor when it falls dramatically. It came off a couple of months ago, and it hasn't made a new downward leg. It will be interesting to see what happens there...the idea at the moment is consumer confidence in July is down a little since June. Consumer spending hasn't fallen of the map. The consumer spending for July was ok. It wasn't double dip material. It wasn't awful," he said.
John Spinello, Treasury strategist at Jefferies, said he will be watching the employment component of the consumer confidence report. He said even if it's not a market mover, bonds could see month end volatility Tuesday.
He said some of Monday's activity was due to index buyers ahead of the month end. "There was good buying in bonds, not just speculative stuff. There was legitimate buying overnight, foreigners buying over night," he said.
"We'll be volatile and in a thin market, we will have an underlying bid if we do trade down. I don't think we'll reach the yields we saw last Wednesday, but I think the market will fool around with 2.5 percent on the 10-year notes. We'll have lack of selling tomorrow," he said.
The yield on the 10-year was at 2.53 percent Monday, and the 30-year fell to 3.58 percent.
In the foreign exchange market, the Bank of Japan failed to stop the yen's rise, as traders bet against the Japanese government's stimulus plans. The dollar lost nearly a percent against the yen Monday. The dollar gained a half percent against the euro.
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