China GDP Shows Slight Slowdown

The markets are lower this morning, on the heels of a couple of weak economic reports on manufacturing. The Empire State Manuf. Index came in at 5.1, well below the 18.0 estimates, and also down from last month's reading of 19.6. The Philly Fed Index also contracted, falling to 5.1 in July (vs. 10.0 consensus) from the prior month's reading of 8.0.

So the market started out a bit weak, and the selling picked up when the Philly Fed was released. Of course, after a 7-day rally, any excuse to take profits is fairly normal.

On the earnings front, JPMorgan (JPM) reported better than expected results, led by a large decrease in loan loss reserves. But given this morning's selling, the news has done little to lift financial stocks.

In overseas news, China released its Q2 GDP estimate last night, and said their economy grew 10.3% during the period, which was a tad below estimates and below the Q1 rate of 11.9%. I think the slowdown was expected, and how growth holds up for the second half of the year is the bigger question right now.

Asian markets were lower overnight, led by China (-1.9%). European markets are lower this morning, despite the euro bouncing to 2-month highs vs. the dollar. In commodities, oil prices are lower to $75.75, and gold prices are slightly higher near $1211.

The 10-year yield is lower on the weak economic data, testing the 3.0% level currently; and the volatility index (VIX) is +8.25% higher so far to 26.95.

Trading comment: Today's pullback is not surprising in light of the 7-day rally we just had. At this point, I think any pullback should be modest given that investor sentiment has remained highly bearish during this rally. The ISEE call/put index has been below 100 all week, which indicates more bearish put buying than bullish call buying. The investment advisor surveys also continue to reflect elevated bearish levels.

So the proverbial 'wall of worry' is still there. Of course how the market reacts to the flood of earnings reports to come over the next few weeks remains a wildcard, so we're staying flexible and taking a wait and see approach.

long VXX