Traders will be watching China after long weekend

Wall Street will uncharacteristically focus on China's economic reports and market moves in a shortened week of U.S. trading.

Mainland Chinese markets reopen Monday after a four-day weekend, while U.S. markets open Tuesday after the Labor Day holiday.

"Over the weekend here the market's looking for another response out of China," said John Canally, investment strategist and economist at LPL Financial. "Next week's data out of China is key but I'm not sure anybody is going to embrace strong data. They're just going to assume it's fake. I don't know how China gets itself out of that."

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Traders work on the floor of the New York Stock Exchange.
Getty Images
Traders work on the floor of the New York Stock Exchange.

Chinese trade data are expected early in the week before the U.S. markets reopen. Chinese inflation figures from the producer price index and consumer price index are scheduled for release at 9:30 p.m. ET Tuesday (9:30 a.m. Wednesday Beijing time), according to the National Bureau of Statistics of China.

Peter Donisanu, global research analyst at Wells Fargo Investment Institute, noted markets were disappointed by July's 8.3 percent decline in exports. Markets could have a negative reaction "if we see a number that reflects a continued acceleration (lower)," he said.

However, Donisanu and other analysts emphasized the data are not fully representative of the current Chinese economy.

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"One of the negatives to Chinese data points is so much of it is focused on Chinese manufacturing growth than on services, which is getting a little better," said Jeffrey Kleintop, chief global investment strategist at Charles Schwab. "We'll see what we make of it but a lot of the data should be pretty soft. Not new news."

Against the global backdrop, stocks could see more volatility in next week's four-day trading period as anxiety over the timing of liftoff builds in the relative vacuum of news between the employment report and the Federal Reserve's meeting.

"The prospect of a Fed rate hike has woken people up to the fact the world's not so hot," said Peter Boockvar, chief market analyst at The Lindsey Group.

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Many analysts said Friday's key nonfarm payrolls report likely gives the central bank enough ammunition for raising rates at its Sept. 16-17 meeting.

"The Fed is extremely dedicated to show that they have a real economy (and that) they will raise rates this year," said Alan Rechtschaffen, financial advisor and senior vice president at UBS Wealth Management Americas. For turbulence in markets to deter the Fed there would need to be "more dramatic volatility than what we've seen this year."

Traders will continue to scrutinize minor pieces of data due out next week before the Fed's meeting this month. Fed Chair Janet Yellen's preferred measure of employment, the Job Openings and Labor Turnover Survey (JOLTS) is due Wednesday. Wholesale trade comes out Thursday and PPI and consumer sentiment are scheduled for Friday. Better consumer sentiment that translates into spending adds support to the Fed's case for reaching its 2 percent inflation target.

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Against the economic backdrop, U.S. stocks are still recovering from a sharp selloff.

Stocks closed down more than 1 percent Friday, with the S&P 500 falling 1.5 percent to 1,921, right on the edge of correction territory, or 10.00 percent from its 52-week intraday high. The Dow Jones industrial average ended down 1.66 percent at 16,102 and the Nasdaq shed 1.05 percent to 4,683, both in correction mode.

The Dow and S&P are less than 6 percent above their 52-week lows set this past August and last October, respectively. The Nasdaq is less than 15 percent above its 52-week low set last October.

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"The real risk is if we break below October's lows (of 1,820), we see a real substantial decline," said Lance Roberts, head of Streettalklive.com. He noted that similar sharp declines in 2008-2009, 2010 and 2011 that were only halted by quantitative easing from the Fed.

Other strategists are also still watching for stocks to set a bottom.

"We're still in the retest mode," Canally said. He noted historic selloffs often occur in the fall, putting caution "that's in the back of investors' minds."

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"We constantly tell (clients) market bottoms are a process. This process is going to take longer than October 2014 (because of China). Getting the Fed out of the way would be great but I don't think it's going to subside," he said.

Traders will continue to watch crude oil prices which ended several volatile sessions of trade mildly lower above $46 a barrel. Stabilization in the commodity complex would also alleviate fears of a severe global growth slowdown.

"We still don't think we're in a bear market because the U.S. is not in a recession," Canally said.

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The one bright point next week, said Bill Stone of PNC, is "you should see more liquidity in the market. Quite a lot of people back from vacation."

Friday's declines could even indicate a pricing-in of China-driven volatility early next week, he said.

In other calendar items next week, Apple could announce its next-generation iPhone at its event Wednesday.

On Friday, Kroger will be the last S&P 500 company to report second-quarter earnings.

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Monday

Markets closed for Labor day

Tuesday

Earnings: Casey's General, Dave & Buster's, Men's Wearhouse, Pep Boys, TiVo

10 a.m.: Labor Market Conditions Index

1 p.m.: Three-year note auction

3 p.m.: Consumer credit

Wednesday

Earnings: HD Supply Holdings, Barnes & Noble, Hovnanian, Palo Alto Networks, Box, Krispy Kreme

7 a.m.: Mortgage applications

10 a.m.: JOLTS

10 a.m.: Quarterly services survey

1 p.m.: 10-year note auction

Thursday

Earnings: Lululemon Athletica, Finisar, Zumiez

8:30 a.m.: Jobless claims

8:30 a.m.: Import and export prices

10 a.m.: Wholesale trade

10:30 a.m.: Natural gas inventories

11:00 a.m.: Oil inventories

1 p.m.: 30-year bond auction

4:30 p.m.: Fed balance sheet, money supply

Friday

Earnings: Kroger, Mattress Firm

8:30 a.m.: PPI

10 a.m.: Consumer sentiment

1 p.m.: Oil rig count

2 p.m.: Treasury budget