State of the Stock Market Analysis for the Week Ending on August 19th, 2018 Despite International Headwinds, Major Indices Finished Week with Gains 8-19-18)

All You Need Is Jobs

Judging by the headlines, last week could have been a very rough one for bulls, with the currency crisis in Turkey, economic troubles in China, and mixed economic numbers threatening the rising trend. Despite the worries and the international headwinds, the major indices finished the week with gains, with only the Nasdaq closing the week with a small loss. Earnings were still in focus last week, and since we now have almost all the data, we can conclude that the second quarter even surpassed the record-breaking expectations. With that in mind, the technical strength of the U.S. market shouldn’t be a surprise for investors, although several international benchmarks are in much worse shape.

It was a busy week concerning economic numbers, and given the escalation in the tariff war, China’s economic weakness turned a lot of heads. While the domestic economy is doing just fine, Chinese indicators missed across the board again, raising concerns about global growth. Retail sales came in well above the consensus estimate, reassuring the Gorilla about the ongoing consumer boom, which was reflected in the strong quarterly report of Walmart as well. The housing market provided a slight negative surprise, as housing starts missed expectations, but building permits actually managed to bounce back after a gloomy month.

The technical picture remains bullish, even as the recent small corrections took the major indices closer to their short-term moving averages. The Dow touched its 50-day average before its late-week surge, while the S&P 500 and the Nasdaq remained well above theirs, despite the tech weakness before the weekend. All three benchmarks are way above their rising 200-day moving averages, and the Russell 2000 is also well clear of its long-term indicator, although it is just north of its short-term moving average. The Volatility Index (VIX) surged higher amid the mid-week mini panic, hitting an almost two-month high and getting close to 17, but it pulled back sharply in the second half of the week to close near 13.

Market internals improved somewhat last week, and although not everything is rosy “under-the-hood,” divergences are pointing upward. The Advance/Decline line rose to another new bull market high, despite the brief selloff, as advancing stocks outnumbered declining issues by a 4-to-1 ratio on the NYSE and by a 3-to-2 ratio on the Nasdaq. The average number of new 52-week highs was little changed on both exchanges, rising to 85 on the NYSE, while falling to 68 on the Nasdaq. The number of new lows declined in the meantime, falling to 44 on the NYSE, and 76 on the Nasdaq. The percentage of stocks above their 200-day moving average fell below 50% on Wednesday, but it bounced back strongly and closed the week near 51% yet again.

The most-shorted issues stagnated for most of the week, but they finished on a positive note, which is usually a bullish sign for the broader market too. Duluth Holdings (DLTH) had another blowout week, gaining more than 10%, and given its short interest of 48%, further highs could be in the cards for the stock. iRobot (IRBT) is getting closer and closer to its all-time high from a year ago, adding another 8% last week, and since short interest still stands at 40%, bears might fuel a breakout soon. Hormel Foods (HRL) still sports one of highest days-to-cover (DTC) ratios in the market, with a reading of 17, and the stock hit a new 21-month high on Friday, possibly starting a major rally.

All eyes will be on the Fed’s usual annual gathering in Jackson Hole this week, and although analysts don’t expect anything earth-shattering from the Central Bank, even a small change in the bank’s rhetoric could have a huge impact on stock markets. The minutes from the Fed’s previous meeting will also be released on Wednesday, on the day before the start of the symposium, while the week will be otherwise light on economic releases. Existing home sales will also be published on Wednesday, while the most awaited release the durable goods report will be coming out on Friday. The Gorilla thinks that emerging markets will continue to cause troubles, but last week’s price action proved once again that the foundations of the bull market are stable. Stay tuned for an interesting week!

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