Sell On The News

Stocks sold off after 10 AM ET...even though economic newscame in better than expected, government incentives continue to make it difficult to gauge true demand.

Look at pending home salesfor July. These are contract signings--a leading indicator of existing home sales because most (over 80 percent) will turn into closing. They were above expectations, but the expiration of the first time home buyer tax credit in November is clearly muddying the water.

1 Year Later: The Month that Shook the World

How muddy? The National Association of Realtors (NAR) estimates that the first time tax credit may attract nearly 2 million buyers, 350,000 of which would not have purchased a home absent the incentive.

It's the same with Cash for Clunkers--strong sales under the program is making it difficult to gauge true demand.

Here's how much cash for clunkers distorted the market: it's been estimated that 15.3 to 16 million vehicles were sold in August on a seasonally adjusted annual rate (SAAR). Of that, Barclays Capital estimates that 6.8 million of that (about 43 percent at the midpoint) were cars sold under the cash for clunkers program.

Try figuring out future vehicle sales with that kind of distortion. That SAAR of over 15 million vehicles compares to the 11.2 million rate of July and the 9.6 million average 2009 selling rate before the cash for clunker program started.

You can see the effect this program has had on Ford, which likely recorded sizeable sales gains in August. It hit a 52-week high of $8.86 in the first week of August on word of strong sales from the Cash for Clunkers program, and has struggled since then, now trading around $7.65.



Questions? Comments? tradertalk@cnbc.com