The big selloff in China overnight certainly affected sentiment coming into the open for US stocks, and our market is under considerable selling pressure in early trading.

China's Shanghai Composite fell -6.7% after mainland fund managers reduced their recommended allocation to equities for the first time in six months. The timing seems a bit late, given that last month Chinese stocks suffered their second largest one-month losses in 15 years. There has also been persistent concerns about tighter lending practices coming in the economy.

The negative news out of China overshadowed two high-profile acquisitions. Baker Hughes (BHI) is acquiring BJ Services (BJS) in the oil services arena for $5.5 billion. And Disney (DIS) will buy Marvel Entertainment (MVL).

The dollar is lower this morning, but commodity prices are down also. This is weighing on the energy and materials sectors, which are leading the downside action among the 10 major S&P sectors, all of which are currently in negative territory for the day.

The 10-year yield is lower to 3.42% and the VIX is +7.1% higher to 26.53, spiking above its 50-day average that has acted as solid resistance since the rally began in March.

Trading comment: Although the financials are lower, our CME add from Friday is bucking the weakness so far. I also put on a short China (FXP) trade last week, but have not taken any profits yet.

The media continues to run story after story about how September is historically a bad month for stocks. I wonder if this will lead to another quick spike in bearish sentiment if the market continues to selloff? Last week's AAII survey already showed a big spike in pessimism, but I will be on the lookout for other supporting indicators.

long CME, FXP