State of the Stock Market Analysis for the Week Ending on July 14th, 2019 (All-Time Highs | State of the Stock Market 07-14-19)

All You Need Is Jobs

The major indices all hit new all-time highs this week, with even the recently lagging Dow showing strength, surpassing the historic 27,000 level for the first time. The Federal Reserve and Chairman Jerome Powell stole the show on Wall Street, thanks to the release of the FOMC meeting minutes, and Mr. Powell’s testimony in Washington. Following last week’s strong government jobs report, investors began doubting the necessity of the rate cut that the Treasury market had fully ‘priced in’, but the Chairman reiterated the Central Banks’ intention to ease, creating a relief rally in stocks in the second half of the week. The Chairman cited the global economic slowdown and trade tension as the main reasons behind his cautionary stance. However, with the domestic economy holding up well, stocks could get a huge extra boost from the shift in the Fed’s monetary policy.


The key economic releases were mostly positive this week, although the higher-than-expected inflation numbers are clearly not bullish for stocks. Both the core Consumer Price Index (CPI) and the PPI came in at 0.3%, above the consensus estimates and the Fed’s inflation target. While price pressure seemed to be easing this year, leading to a steep drop in Treasury yields together with the global economic slowdown, last week’s government jobs report and this week’s upbeat numbers point to healthy domestic demand. The weekly number of new jobless claims was also lower-than-expected, crude oil inventories declined substantially again, and even though the JOLTS job openings number missed expectations, the outlook for the job market remains stable.


The technical picture continues to be in bulls’ favor because even though the post-payroll dip could have turned into a deeper correction following the strong rally in June, the major indices remained stable. The S&P 500, the Nasdaq, and the Dow are all well above their 200-day moving averages, and the benchmarks are also still north of their rising 50-day moving averages. Small-caps continue to be suspiciously weak, as the Russell 2000 was virtually unchanged this week, despite the new all-time highs hit by its large-cap peers. While the Volatility Index (VIX) got close to the 15 level on Tuesday, it turned sharply lower in the second half of the week, closing just above 12, marking its lowest close since April.


Market internals still support the bullish case as well, even though the Russell 2000’s weakness remains a concern, and some of the most reliable measures are starting to show negative divergences. The Advance/Decline line edged higher despite the mixed price action, as advancing issues outnumbered declining stocks by a 4-to-1 ratio on the NYSE, and by a 3-to-1 ratio on the Nasdaq. The average number of new 52-week highs was virtually unchanged on both exchanges, ticking higher to 165 on the NYSE and 148 on the Nasdaq. The number of new lows declined in the meantime, falling to 51 on the NYSE and 59 on the Nasdaq. The percentage of stocks above their 200-day moving average declined surprisingly, but the indicator still closed the week slightly above the 60% level.


Short interest declined for the second week in a row on Wall Street, and thanks to the confirmed dovish bias from the Fed, bears may remain in hibernation in the coming weeks and months. Eidos Therapeutics (EIDX) continued to hit new all-time highs this week, and even though its short interest declined to 42%, it could still be in for further gains. Another biotech firm, Akcea (AKCA) could finally be ready to make a move following three bearish months, and given its short interest of 41%, this week’s rally could be the start of a larger-scale advance. Medical equipment provider Henry Schein (HSIC) is sporting a very high days-to-cover (DTC) ratio of 13, and since the stock is close to breaking out from a consolidation pattern, the rally that started in March might soon continue.


Financials and healthcare companies will kick off earnings season next week, as companies with more than $3 trillion in market cap will report. Investors will get some useful information regarding the two sectors. JP Morgan (JPM), Bank of America (BAC), Wells Fargo (WFC), Citigroup (C) American Express (AXP), Johnson & Johnson (JNJ), and United Health will all publish their quarterly numbers, but IBM’s (IBM) report could also make waves. Besides the significant day-to-day fluctuations and the opening gaps caused by the earnings reports, trading activity could remain relatively light next week since we will only have a few key economic numbers due to be released. While Tuesday’s retail sales report and Thursday’s Philly Fed Index could move markets, this month’s rate cut by the Fed seems all but certain at this point, and technicals are also pointing to further gains in stocks as well. Stay tuned!


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