Bear Radar

Style Underperformer:

• Small-Cap Value +.53%

Sector Underperformers:

• 1) Steel -.73% 2) Papers -.61% 3) Hospitals -.21%

Stocks Falling on Unusual Volume:

• VSAR, GSBD, SONC, BEAT, PEB, JNP, AIV, PHI, LULU, BLKB, TVIX, LHO, RIO, NTT, HST, AMAG, RLJ, ICPT, VOD, RLYP, PSXP, TLK, SAM and CONN

Stocks With Unusual Put Option Activity:

• 1) SWN 2) EWA 3) XLB 4) PHM 5) MMM
  

Stocks With Most Negative News Mentions:

• 1) CONN 2) PEB 3) MRVL 4) AEO 5) RPTP
  

Charts:

• ETFs Falling on Unusual Volume

• Stocks Falling on Unusual Volume

Bull Radar

Style Outperformer:

• Large-Cap Value +.78%

Sector Outperformers:

• 1) Software +1.26% 2) Road & Rail +1.22% 3) Internet +1.11%
  

Stocks Rising on Unusual Volume:

• GWPH, TTPH, GTN, MYGN, OI, ADXS, GWR, BRS and TAP

Stocks With Unusual Call Option Activity:

• 1) TAP 2) CTXS 3) PNK 4) SD 5) SYY
  

Stocks With Most Positive News Mentions:

• 1) KMB 2) AA 3) WHR 4) MYL 5) EFX
  

Charts:

• ETFs Rising on Unusual Volume 

• Stocks Rising on Unusual Volume

Morning Market Internals

NYSE Composite Index:

• Volume Running 11.2% Below 100-Day Average
• 10 Sectors Rising, 0 Sectors Declining
• 64.6% of Issues Advancing, 31.9% Declining
• 9 New 52-Week Highs, 56 New Lows
• 23.1% of Issues Above 200-day Moving Average
• Average 14-Day RSI 37.9
• Vix 22.8
• Total Put/Call .96
• TRIN/Arms .56

Tuesday Watch

Evening Headlines 

Bloomberg:

• Levy Pitches Budget Cuts and Tax Hikes to End Brazil Deficit. Finance Minister Joaquim Levy proposed a new round of spending cuts and tax increases that are designed to close the budget gap and protect Brazil from further credit downgrades. The government will reduce expenditures by 26 billion reais ($6.8 billion) next year in large part by capping salaries of civil servants and trimming social programs, Levy said Monday. Brazil also plans to raise 28 billion reais in revenue by boosting taxes, including a levy on financial transactions. 

• Yen Pares Loss as Bank of Japan Refrains From Adding to Stimulus. The yen pared losses after the Bank of Japan refrained from adding to already unprecedented stimulus at a policy meeting Tuesday. Demand for the yen increased after central bank Governor Haruhiko Kuroda kept a pledge to expand the monetary base at an annual pace of 80 trillion yen ($666 billion). All but two of the 35 economists surveyed by Bloomberg had predicted policy would be unchanged. Traders are shifting their focus to Kuroda’s briefing at 3:30 p.m. in Tokyo. “The market is placing a higher probability that the BOJ will ultimately add more stimulus via quantitative easing,” Prashant Newnaha, a rates strategist at TD Securities Inc. in Singapore, said before the BOJ decision. The yen was little changed at 120.16 per dollar as of 12:11 p.m. in Tokyo, after falling as much as 0.3 percent earlier. It traded at 136.01 against the euro from 136.07 on Monday.

• How Likely Is a Physical Conflict in the South China Sea? (video) 

• China Brokers Shut Out of Own Futures Market Try Singapore. Chinese brokerages ruing the collapse of futures trading in Shanghai are pitching clients similar contracts in Singapore. "Goodbye, China Financial Futures Exchange; Hello, FTSE A50!" reads an advertisement by a unit of Shenzhen-based Essence Securities Co. on the WeChat messaging service, referring to Singapore-traded futures on an index of the biggest mainland companies. China’s domestic equity futures market, ranked the world’s busiest as recently as July, has seen volumes plunge 99 percent since June as policy makers curbed leverage and position sizes and announced investigations into “malicious” short sellers. That’s left brokerages, which boosted staff numbers by 50 percent since 2011, turning to promoting contracts on the SGX FTSE China A50 Index as an alternative.

• RBA Says China Slowdown, Market Rout Raise Global Risks. The Reserve Bank of Australia said China’s slowdown and market volatility increased risks to global growth, highlighting the economic challenges confronting new Prime Minister Malcolm Turnbull. “International economic developments had increased the downside risks to the outlook,” the central bank said in minutes of its Sept. 1 meeting released Tuesday, in which it unusually gave global markets top billing. “But it was too early to assess the extent to which this would materially alter the forecast for GDP growth in Australia’s trading partners.”

• The U.S. Dollar Is Gaining Like It's the 1980s -- For Better or Worse. The dollar is in the midst of its strongest rally since 1984 and -- unlike then -- there may be little anyone can do to stop it. Thirty years ago this month, the U.S. was powerful enough to muscle its way out of a damaging trade imbalance when it took financial markets by surprise with the Plaza Accord. In that agreement, it persuaded Japan, Germany, France and the U.K. to join in coordinated action to help weaken the dollar.

• China Stocks Post Biggest Two-Day Loss in Three Weeks on Economy. China’s stocks fell for the steepest two-day loss in three weeks amid concern the economic slowdown is deepening as traders weighed state support for equities. The Shanghai Composite Index dropped 1.8 percent to 3,059.01 at 9:33 a.m. local time, led by material and technology shares. The benchmark gauge plunged 2.7 percent on Monday after weekend data showed industrial output missed economists’ forecasts and investment in the first eight months increased at the slowest pace since 2000.

• Asia Stocks Erase Gains as China Shares Slide; Yen Slips on BOJ. Asian stocks dropped as Shanghai shares fell, while Australia’s dollar snapped a six-day advance after the country’s central bank said volatility emanating from China has increased risks to global growth. The yen weakened amid speculation policy makers will signal more stimulus Tuesday. The Shanghai Composite Index headed for its biggest two-day slide in three weeks, while a measure of Chinese shares in Hong Kong was little changed. Australia’s S&P/ASX 200 Index deepened declines and the Aussie weakened after the Reserve Bank of Australia released minutes of its Sept. 1 meeting. The yen slipped 0.2 percent, boosting Japanese equities. U.S. oil held below $45 a barrel before data on American stockpiles, while corn climbed.

• Investors in Riskier Slice of CLOs Signal More Pain Ahead. Investors in funds that are the biggest buyers of leveraged loans are signaling concern that some managers may have taken on too much risk as the commodities slump persists. To own the BB rated portion of collateralized loan obligations in the secondary market, investors are demanding 7 percentage points to 9 percentage points more than a benchmark rate, according to Wells Fargo & Co. analyst Dave Preston. The gap probably hasn’t been that wide since the financial crisis, he said. The $411 billion U.S. CLO market’s exposure to commodities-related companies has risen this year, even as crude prices have dropped about 60 percent from last year’s high, increasing concerns about the potential for downgrades and defaults. Leveraged-loan prices fell last month to a more than three-year low, with some energy debt being particularly hard hit.

• Here's Why the Fed May Not Raise Rates This Week. (video)

• Get Used to Volatility, Says Hedge Fund That Called August Rout. Anthony Limbrick, whose hedge fund profited on bearish wagers during the August rout, says the recent turbulence in markets heralds a new era in increased volatility. One clear sign to Limbrick: U.S. stocks are expensive -- valuations for U.S. stocks when compared to earnings before interest, tax, depreciation and amortization hark back to the dot-com bubble era. Another: Emerging markets will continue to plague developed peers for years to come, mirroring the Asian financial crisis of the 1990s, he says. Limbrick’s firm, 36 South Capital Advisors, saw trouble brewing in developing economies back in 2013. And he says the Federal Reserve won’t do anything to calm equities after the twin concerns about China and a rate hike sent the VIX soaring 135 percent last month. “It may well be ‘sell the rumor, buy the fact’ into the Fed meeting,” with stocks initially rising, but “how long that relief rally lasts for is an important question,” said Limbrick, the head of quantitative research at 36 South in London. “Markets may have an upward bias for a while, but we’d expect to see another leg down.”

Wall Street Journal:

• Oil Patch Braces for Financial Reckoning. Smaller producers are girding for cuts to credit lines, as crude prices show little sign of rebounding. U.S. energy companies have defied financial gravity for more than a year, borrowing and spending billions of dollars to pump oil, even as crude prices plummeted. Until now. The oil patch is expected to finally face a financial reckoning, experts say, with carnage occurring as early as this month. One trigger: Smaller drillers are bracing for cuts to their credit lines in October as banks re-evaluate how much energy companies’ oil and... 

• Citic Securities Draws Beijing’s Ire After Meltdown. The brokerage arm of China’s most politically pedigreed financial firm has found a number of its executives entangled in a government inquiry. The brokerage arm of China’s most politically pedigreed financial firm entered the summer with big gains in profit. Now, Citic Securities Co. is contending with a near meltdown in markets and a government crackdown that has entangled a number of its top executives.

• Insiders Beat Market Before Event Disclosure: Study. Researchers from Columbia, Harvard find small but persistent edge.

• Hillary’s For-Profit Education. The company that paid Bill doesn’t do well on the Obama scorecard. Hillary Clinton has vowed to crack down on for-profit colleges. Very interesting. We wonder if she or her aides have looked at the new “college scorecard” that the Obama Administration released on the weekend.

Fox News:

• Cold War weaponry and modern military hardware: Inside the ISIS arsenal. In January the U.S. Central Command announced that U.S. and coalition airstrikes against Islamic State targets in Iraq and Syria destroyed some 184 Humvees, 58 tanks and nearly 700 other vehicles. The number of ISIS military vehicles destroyed may seem significant, but is really just a drop in the bucket compared to the militants' overall firepower. While specific numbers are difficult to come by, reports suggest that ISIS has a huge fleet of vehicles – including tanks - its possession. Last year, for example, the jihadists captured 2,300 Humvees from Iraqi forces when they captured the city of Mosul, some of which were then converted to armored vehicles.

• Obama’s revamped college evaluation site ripped as ‘misleading,’ unnecessary. (video) President Obama has launched a scaled-back college evaluation website that does not include what some in the higher-ed world had feared -- a government rating system of America’s roughly 7,000 colleges and universities.

CNBC:

• Ex-Fed official: Central Bank should bring more uncertainty. (video)

Zero Hedge:

• Barclays Slashes China GDP Projections After Weak Data.

• USDJPY Surges Ahead Of BoJ Statement, China Strengthens Yuan As Washington Folds On Cybersecurity Sanctions. (graph)

• Goldman Warns: VIX Is Not Going Back To Low-Teens, No Matter What Fed Does. (graph)

• A Panicked Brazil Promises Billions In Austerity, Does 180 On Budget After Downgrade.

• "Ineffective & Reckless" Fed Is An "Engine of Disaster". (graph)

• "The Danger Is That It Bursts Just Like In The US": Sweden Goes Full Krugman, Gets Massive Housing Bubble.

• Fourth Turning: Crisis Of Trust, Part 2. (graph)

• A Flock Of Black Swans.

• "There's Just No Cash" Oil Price Increase Will Not Come Fast Enough To Save Alberta. (graph)

• VIX Has Not Done This Since The USA Was Downgraded. (graph)

• It All Comes Down To This. (graph)

• The Fed Shouldn't Worry About Losing Credibility: It Already Lost It.

• China Churn & Fed Fears Spark Sleepy Stock Slippage. (graph)

Business Insider:

• A new global recession has begun.

• This number may be the biggest 'alarm siren' in Hillary Clinton's brutal summer.

• Why European leaders are lining up behind Assad.

• Global trade is slowing. (graph)

Reuters:

• Japan business mood sinks on China anxiety, weak demand -Reuters Tankan. Japanese manufacturers' confidence slumped the most in a year in September to an eight-month low and is forecast to worsen further as fears of a China-led global economic slowdown grow, a Reuters poll showed. Domestic demand also looks increasingly fragile as service companies reporting the weakest sentiment since March and predicted further deterioration in the coming three months.

Telegraph:

• Fitch warns of emerging market shock if Fed sticks to rate plan. Investors do not believe the US Federal Reserve will dare to take away the punch bowl. They may be in for a nasty surprise if it does.

Evening Recommendations 

• None of note

Night Trading

• Asian equity indices are -1.25% to +.25% on average.

• Asia Ex-Japan Investment Grade CDS Index 133.5 -1.5 basis points.

• Asia Pacific Sovereign CDS Index 85.5 -.5 basis point.

• S&P 500 futures +.11%.

• NASDAQ 100 futures +.13%.

Morning Preview Links

Earnings of Note

Company/Estimate

• (UNFI)/.72

Economic Releases

8:30 am EST

• Retail Sales Advance for August are estimated to rise +.3% versus a +.6% gain in July.

• Retail Sales Ex Autos for August are estimated to rise +.2% versus a +.4% gain in July.

• Retail Sales Ex Auto and Gas for August are estimated to rise +.4% versus a +.4% gain in July.

• Empire Manufacturing for September is estimated to rise to -.5 versus -14.92 in August.

9:15 am EST

• Industrial Production for August is estimated to fall -.2% versus a +.6% gain in July. 

• Capacity Utilization for August is estimated to fall to 77.8% versus 78.0% in July. 

• Manufacturing Production for August is estimated to fall -.3% versus a +.8% gain in July.
  

10:00 am EST

• Business Inventories for July are estimated to rise +.1% versus a +.8% gain in June.
  

Upcoming Splits

• (MDVN) 2-for-1

Other Potential Market Movers

• The Eurozone Trade Balance, German ZEW Index, UK CPI report, RBA minutes, US weekly retail sales reports, BMO Media/Telecom Conference, (HPQ) analyst meeting, (ARMH) investor day, (CRM) investor day and the (SYY) investor day could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by commodity and financial shares in the region. I expect US stocks to open mixed and to weaken into the afternoon, finishing modestly lower. The Portfolio is 25% net long heading into the day.

Stocks Reversing Lower into Final Hour on China Bubble-Bursting Fears, Commodity Declines, US High-Yield Debt Angst, Homebuilding/Energy Sector Weakness

Broad Equity Market Tone:

• Advance/Decline Line: Lower
  

• Sector Performance: Almost Every Sector Declining
  

• Volume: Light

• Market Leading Stocks: Performing In Line

Equity Investor Angst:

• Volatility(VIX) 24.36 +4.91%

• Euro/Yen Carry Return Index 141.87 -.64%

• Emerging Markets Currency Volatility(VXY) 12.66 -.16%

• S&P 500 Implied Correlation 65.31 +3.01%

• ISE Sentiment Index 81.0 -2.0%

• Total Put/Call .99 -17.5%

• NYSE Arms .99 +13.7% 

Credit Investor Angst:

• North American Investment Grade CDS Index 79.94 +.23%

• America Energy Sector High-Yield CDS Index 1,925.0 +1.07%

• European Financial Sector CDS Index 82.50 +.35%

• Western Europe Sovereign Debt CDS Index 21.97 +2.33%

• Asia Pacific Sovereign Debt CDS Index 86.43 +.34%

• Emerging Market CDS Index 354.51 +.04%
  

• iBoxx Offshore RMB China Corporates High Yield Index 118.21 +.30%

• 2-Year Swap Spread 13.5 -1.0 basis point

• TED Spread 31.25 unch.

• 3-Month EUR/USD Cross-Currency Basis Swap -25.25 -1.25 basis points

Economic Gauges:

• 3-Month T-Bill Yield .03% unch.

• Yield Curve 145.0 -3.0 basis points

• China Import Iron Ore Spot $58.1/Metric Tonne -1.54%

• Citi US Economic Surprise Index -20.3 +1.9 points

• Citi Eurozone Economic Surprise Index 24.5 -.1 point

• Citi Emerging Markets Economic Surprise Index -24.3 -1.5 points

• 10-Year TIPS Spread 1.56 -3.0 basis points
• # of Months to 1st Fed Rate Hike(Morgan Stanley) 3.94 -.01

Overseas Futures:

• Nikkei 225 Futures: Indicating -11 open in Japan 
• China A50 Futures: Indicating -496 open in China

• DAX Futures: Indicating +15 open in Germany

Portfolio: 

• Slightly Lower: On losses in my biotech/retail/medical sector longs

• Disclosed Trades: Added to my (IWM)/(QQQ) hedges 

• Market Exposure: Moved to 25% Net Long

Today's Headlines

Bloomberg:

• Europe Fortifies Frontier as Germany Imposes Border Controls. European Union countries followed Germany’s lead to fortify their frontiers, slowing the movement of goods on the continent as lines of cars formed in some border areas. Germany’s move on Sunday to introduce the temporary controls on the southern border with Austria, where thousands of migrants have been crossing into the country, set off a ripple effect as others further tightened their frontiers. Austria and Slovakia said they will send more troops to patrol their borders, while Poland said it was ready to take similar actions should such a move prove necessary. The Netherlands also planned to beef up border checks. The re-imposition of controls departs from an effort over the past 20 years to relax restrictions and open Europe’s internal borders under what is known as the Schengen agreement.
• China Data Deepens Concerns of an Economic Slowdown. (video)
• China’s Slowdown May Be More Than a Correction. (video)
• As China Slows, Will We See Further Yuan Devaluation? (video)
• Brazil's Real Falls to 13-Year. Brazil’s real approached a 13-year low and the Ibovespa fluctuated as disappointing Chinese economic data added to concern the nation’s top trading partner is slowing further.
• Brazil Downgrade Leaves Firms With $270 Billion Debt Hangover. Brazilian companies that piled on $270 billion in international debt during the boom years are seeing their funding costs rise after the nation’s credit rating was cut to junk. The spread for five-year credit-default swaps to protect against a government default, one benchmark for setting what Brazilian companies must pay for external funding, has jumped 7.5 percent to 400 basis points since the downgrade, the highest since 2009. Adding to the pain, the dollar surged to a 13-year high, making principal and interest on international borrowing more costly for local firms. “Even very small, unknown companies issued international bonds when Brazil was considered one of the most promising economies after the 2008 financial crisis,” Salvatore Milanese, a partner at debt-restructuring adviser firm Pantalica Partners, said in a interview in Sao Paulo. “Now many of them are facing the consequences.” 
• China's Stocks Decline Most in Three Weeks on Slowdown Concerns. (video) China’s stocks slumped the most in three weeks as data over the weekend added to concern the economic slowdown is deepening and traders gauged the level of state support for equities. The Shanghai Composite Index slid 2.7 percent to 3,114.80 at the close, paring earlier declines of 4.7 percent. About 12 stocks fell for each that rose on the gauge, led by technology and consumer companies. 
• August Correction Places European Stocks in Bearish Death Cross. Last month, it happened to the Dow Jones Industrial Average, then to an index of global non-U.S. stocks. Now, the ominous death cross pattern watched by market skeptics has formed in European equities. Traders who track signals from charts say a death cross in the Stoxx Europe 600 Index -- created when the benchmark’s 50-day average price slipped below its 200-day average -- shows bearish sentiment is prevailing. The index has fallen 14 percent from a record in April.
• Europe Stocks Resume Gains, Rising for First Time in Three Days. (video) After another volatile day, European equities ended lower, with investors gauging the prospects for a Federal Reserve interest-rate increase. Banks fell the most in the Stoxx Europe 600 Index, which lost 0.6 percent at the close of trading in London. The benchmark measure erased gains of as much as 0.9 percent before sliding 0.8 percent.
• Morgan Stanley's Sharma Sees `Long Winter' for Commodities. The commodities bear market may last for many years, with oil dropping as low as $35 a barrel, as production cuts haven’t been sufficient to wipe out the global surplus, according to Morgan Stanley Investment Management Inc. China’s industrial slowdown is weighing on demand growth while a drop in currencies including the Russian ruble has shielded some companies from lower oil prices, deterring them from cutting output, Head of Emerging Markets Ruchir Sharma said. “A long winter in commodities is what we have to be prepared for,” he said by phone from New York. “From places like Russia to Australia the currencies have fallen a lot and so the marginal cost of production for some of these commodities in those countries hasn’t fallen that much.”
• Nickel Poised for Biggest Loss in Three Weeks on Demand Concerns. Nickel for delivery in three months fell 3.7 percent to settle at $9,920 a metric ton at 5:50 p.m. on the London Metal Exchange, the biggest loss since Aug. 24. The commodity has slumped 35 percent in 2015.
• Copper Rally Halted by China Industrial Production. (video)
• Takes More Than a $2 Trillion Stock Rout for Recession Bell. You’ll go broke trying to predict stock selloffs by looking at the economy: the tell-tale evidence is rarely there. But looking for clues to the economy in a stock selloff -- that actually works. So what inferences can economists draw from the past month, when the Standard & Poor’s 500 Index fell 12 percent in the worst tumble since 2011? To summarize, while equity losses suggest odds of a slowdown in the U.S. have risen, they’re not yet severe enough to incite panic.
• Biden Secretly Meets With Top Obama Bundler During New York Swing.

CNBC:

• The bears are jumping on these stocks. (video)

Zero Hedge:

• Citi Just Made "Global Recession In 2016" Its Base Case Scenario.
• UniCredit To Fire 10,000 As EU Bank Pink Slip Pandemonium Continues.
• Obamacare Backfires - 400,000 Immigrants Lose Benefits.
• Enough Already! Raise The Rate To 3 Percent. (graph)
• Russian Tanks, Artillery Massing Near Syrian Airfield, US Officials Tell Reuters.
• "It Looks To Me Like A Bubble Again", Shiller Warns On US Stocks. (video)
•  Behold The European Recovery: Deutsche Bank(DB) To Fire 25% Of All Workers.
• Europe Approves "Military Action" Against Refugee Smugglers As Germany Warns 1 Million Coming.
• WTI Tumbles To $43 Handle As Iran 'Price Cut' Sparks Supply Surge. (graph)
• EM FX Bloodbath Continues As Lira Slides To New Low, Tenge Plunges. (graph)
• Australia Has A New Prime Minister: Ex-Goldman Partner Turnbull Overthrows Tony Abbott.

Business Insider: 

• One of the most bullish traders around says 'the game has changed'.
• RICK RIEDER: The Fed might've missed its chance to hike.
• We are witnessing 'the most significant new Russian military foothold in the Middle East in decades'.
• Prices in India are plummeting. (graph)

The Hill: 

• Poll: More than half expect Iran to break deal. More than half of Americans think Iran will violate the terms of the nuclear agreement, according to a new CNN/ORC poll released Monday. Should Iran violate the deal, 64 percent said America should respond with military action. In addition, a majority disapproves of the way President Obama is handling the U.S. relationship with Iran, according to the poll, which looked at a variety of domestic and international issues.