U.S. stocks closed lower Monday after a sharp decline in China’s main stock index reignited worries that the six-month old rally defies logic and is built mostly on hype.  Yesterday’s 6.7% plunge in Shanghai Composite Index on concerns over tightening credit in that country sent stocks in Asia sharply lower and led to further selling in Europe.  Treasuries rose as investors shunned equities and turned towards safer bets.  Oil prices declined below $70 per barrel for the first time in almost a week on concerns about China’s growth prospects. 

The 30-stock Dow Jones industrial average shed 47.92 points, or 0.50%, to close at 9,496.28.  The broad Standard & Poor’s 500-stock index was down 8.31 points, or 0.81%, at 1,020.62.  The tech-heavy Nasdaq composite index lost 19.71 points, or 0.97%, to 2,009.06.  Nevertheless, the Dow managed to end August up 3.5% for its fifth monthly gain in six months while the S&P 500-index recorded its sixth consecutive monthly advance.  The market’s measure of volatility, the CBOE Vix “fear factor” index, jumped 5.1% to 26.01, as volume on the NYSE improved to 1.38 billion shares and breadth turned negative to about 11 to 4.

This morning’s stock futures are pointing to a lower opening.  Dow Jones industrial average futures declined 57, or 0.6%, to 9,429. Standard & Poor’s 500 index futures fell 6.90, or 0.7%, to 1,012.80, while Nasdaq 100 index futures fell 11.75, or 0.7%, to 1,613.25.  

Besides the Dow average, the S&P500 index rose 3.4% during the month while the tech-heavy Nasdaq was up a modest 1.5%.  Year-to-date the DJIA has risen 8.2%, the S&P 500 is up 13.0% and the Nasdaq has recorded an impressive 27.4% run.    

Sentiments were jittery on the Street and a couple of big corporate mergers and a better-than-expected regional manufacturing report failed to arrest the slide.  The Walt Disney Co. (NYSE:DIS) announced that it would acquire Marvel Entertainment (NYSE:MVL) in a $4 billion cash-and-stock deal.  Disney shares fell 3% to $26.04 while shares of Marvel jumped 25% to $48.37.  In another cash and stock deal, oil field services provider Baker Hughes (BHI) said it had agreed to acquire BJ Services (BJS) for $5.5 billion.  Baker Hughes plunged 9.6% to $34.45 after it announced the deal.  Shares of BJ Services rose 4.1% to $16.06.  

The DJ-UBS commodity index declined 1.7%, sending shares of Alcoa (NYSE:AA) down 3.6%, and Freeport-McMoran (NYSE:FCX) 3.8%.  However, this morning, a report showing a sixth straight monthly expansion in China’s manufacturing sector to a sixteen-month high of 54 helped Shanghai Composite regain some ground.

Among S&P 500 industry groups, energy shares were the leading decliners, off 1.8%.  Exxon (NYSE:XOM) slid 1.4% to $69.15.  Financials as a group retreated 0.4%.  Insurer AIG (NYSE:AIG) fell for the first time in 10 days, plunging 12% as investors wondered if the stock was fairly valued. Citigroup (NYSE:C) declined more than 4% to $5 while Morgan Stanley (NYSE:MS) eased about 2% to $28.96.

Zacks Investment Research