State of the Stock Market Analysis for the Week Ending on August 26th, 2018 Even With Ups and Downs, Week Ends on Positive Note 8-26-18)

All You Need Is Jobs

While trading activity was light throughout the past week, and the major indices had their ups-and-downs, the week ended on a positive note. The rally was especially impressive in light of the failed U.S.-Chinese trade negotiations, the legal troubles of Donald Trump, and the mounting emerging market woes. Since the S&P 500 is the most important equity benchmark globally, the fact that it finally overcame the correction that started in January meant a lot for statistically-minded analysts. With its new all-time high, the current bull market is now officially the longest in history, and given the broad technical strength and the record level of earnings, we could be in for more of the same.

The Fed’s Jackson Hole symposium definitely stole the show last week, especially since economic releases were few and far between. The Central Bank faced an attack from Donald Trump concerning the ongoing tightening cycle before the annual gathering, and although Jerome Powell did sound a bit more dovish than he has previously, the reaction of the bond market suggests that rate expectations remain stable. Last week’s economic numbers were on the weak side, with existing and new home sales both missing expectations and durable goods orders coming in well below expectations. On a positive note, weekly jobless claims unexpectedly ticked lower, and despite the recent softness in some parts of the economy, there is still no sign of a recession on the horizon.

The technical picture continued to improve gradually, but thanks to the small corrections of the past few weeks, the market is far from being “stretched.” The Dow, the Nasdaq, and the S&P 500 are all well above their 50-day moving averages after the bullish week, and now only the Dow is stuck below its January highs. All three benchmarks are a safe distance from their rising 200-day moving averages, as the long-term trend is still undoubtedly positive. Small-caps marched to new all-time highs last week as well, and the Russell 2000 left behind its short-term moving average, while also staying well above its rising long-term average. The Volatility Index (VIX) drifted lower all week long, despite some intraday spikes, and after hitting a three-week low on Thursday, it finished near the 12 level on Friday.

Market internals had bulls smiling last week, as after a period of divergences, the most reliable indicators improved in a concerted fashion, reflecting the broad rally. The Advance/Decline line continued to hit new highs, as advancing stocks outnumbered declining issues, by a 4-to-1 ratio on the NYSE and by a 5-to-1 ratio on the Nasdaq. The average number of new 52-week highs jumped higher on both exchanges, rising to 120 on the NYSE, and surging 149 on the Nasdaq. The number of new lows fell in the meantime, dropping to 30 on the NYSE, and 36 on the Nasdaq. The percentage of stocks above their 200-day moving average finally left the vicinity of the 50% level with the help of small-caps, as the key measure closed the week near 54%.

The most-shorted issues had another great week, despite the low levels of trading activity, as the calm environment and the declining volatility was hostile for bears. iRobot (IRBT) continued to march higher, as the short squeeze caused more and more casualties, and with short interest still at 41%, the worst might be still ahead for bears. GameStop (GME) popped up on the list of the most shorted stocks, with a short interest of 40%, and since the stock broke out of a consolidation pattern, a major move might just be starting. Henry Schein (HSIC) has one the highest days-to-cover (DTC) ratios among large-caps, with a reading of 16, and as the stock has continued to drift higher since March, the pressure on shorts is building.

August will end with a relatively calm week regarding economic releases, and after last week’s robust performance, stocks seem poised for further gains. The first meaningful indicator, the CB Consumer Confidence Index will come out on Tuesday, the preliminary GDP print will be published on Wednesday, while personal spending and the Chicago PMI will come out on Thursday and Friday, respectively. Last week’s pullback in the dollar could mean that emerging markets will enjoy a calmer period, as currency pressures could ease substantially. And, although the position of the President looks a bit shaky, bulls could be in for another strong week. Stay tuned!

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