State of the Stock Market Analysis for the Week Ending on June 15th, 2019 Bulls Looking Forward to Weeks Ahead | State of the Stock Market 06-15-19)

All You Need Is Jobs

Volatility declined substantially on Wall Street following last week’s strong rally, and although the major indices finished slightly higher, the momentum of the rally clearly weakened. From a broader perspective, the consolidation that we saw makes sense ahead of next week’s FOMC meeting, and after a five-day winning streak, a slight pullback is part of the process. While the border security deal with Mexico pushed stocks higher on Monday, the uncertainty regarding the negotiations with China, the worrisome Brexit-related headlines, and the tension in the Middle East all weighed on equities throughout the week. That said, the benchmarks held on to most of their gains from last week, which bodes well for the coming weeks for bulls.

Although some of the key economic releases were weaker-than-expected this week, such as the headline retail sales number and the core Consumer Price Index (CPI), overall, domestic growth remains solid. Last month’s horrible-looking retail sales report was revised much higher across the board, industrial production continues to defy the global weakness in the sector, consumer sentiment remains near its cycle high, while the NFIB Small Business Index is back near its recent multi-decade high. New jobless claims are still consistent with a robust job market, and even though we received further evidence of a slowdown in China and Europe, the U.S. economy continues to diverge from the rest of the world in a positive fashion.

The technical picture continued to improve, mostly due to Monday’s rally, as the majority of the key trend indicators are now pointing higher. The S&P 500, the Nasdaq, and the Dow are still well above their flat 200-day moving averages, despite the consolidation, and apart from the Nasdaq, the indices are also above their flat 50-day moving averages. While small-caps showed relative strength for a brief period, the Russell 2000 continues to lag behind the broader market, as the benchmark closed below both its short and long-term moving averages on Friday. The Volatility Index (VIX) settled down together with the major indices this week, but its closing value of 15.5 is still well above its pre-correction levels, signaling continued uncertainty.

Market internals showed improvement even during this week’s consolidation, as the most reliable measures continue to confirm the ongoing bull market, in spite of the recent correction. The Advance/Decline ratio hit a new bull market high on the heels of last week’s recovery, as advancing issues outnumbered declining stocks by a 2-to-1 ratio on the NYSE, and by a 3-to-1 ratio on the Nasdaq. The average number of new 52-week highs fell slightly on both exchanges, dropping to 138 on the NYSE and 94 on the Nasdaq. The number of new lows decreased as well, falling to 67 on the NYSE and 80 on the Nasdaq. The percentage of stocks above their 200-day moving average continued to rise thanks to small-caps, closing slightly above the key 50% level on Friday.

The most-shorted stocks remained strong thanks to the hopes that the Fed would cut rates this year, as short interest slightly declined for the second week in a row on Wall Street. Akcea (AKCA) hit its highest level in a month due to a late-week rally, and given its short interest of 43%, the move could continue in the coming weeks. Mimedx Group (MDXG) also sports a short interest of 62%, and following two corrective weeks, the stock may be ready to take off again. H&R Block (HRB) gained almost 10% in a week and considering its very high days-to-cover (DTC) ratio of 14, the stock could be ready to break out of its long-standing trading range.

While the coming week will be relatively light for key economic releases, wild moves are almost certain across asset classes in the second half of the week due to the Fed’s scheduled meeting. Besides Wednesday’s Fed decision, the Philly Fed Index will come out on Thursday, while the less-important building permits will be released earlier on Tuesday. While the Central Bank is widely expected to keep its benchmark rate unchanged, the tone of the monetary statement could be decisive for stocks, given the heightened rate cut expectations for the rest of the year. A reassuringly dovish message could propel the major indices closer to their all-time highs, but a hawkish surprise would likely cause turmoil across the globe. Stay tuned!
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