State of the Stock Market Analysis for the Week Ending on July 6th, 2019 (Momentum Completes Post-Correction Recovery | State of the Stock Market 07-06-19)

All You Need Is Jobs

Thanks to the trade truce with China, the holiday shortened-week started off in a positive fashion, and despite the mixed catalysts, the momentum was enough to finally complete the post-correction recovery. The Nasdaq and the Dow followed in the footsteps of the market-leading S&P 500, hitting new all-time highs ahead of Independence Day. While we need more evidence to conclude that the major technical breakout that we have been waiting for is here, a lot of signs point to a potentially explosive move higher. The fact that the new quarter had a bullish start could also support the rally, although changing rate cut expectations could have a profound effect on risk assets across the globe.

Although most of the week’s key economic releases were mixed, the week ended with a positive government jobs report, causing brief turmoil on Wall Street. The better-than-expected non-farm-payrolls number made investors doubt this month’s rate cut by the Fed, which pushed Treasury yields higher before the weekend. The ISM manufacturing PMI slightly beat the consensus estimate, but the non-manufacturing PMI missed, similarly to the ADP payrolls number, construction spending, factory orders, and the trade balance. For now, most of the key indicators are pointing to a slowdown, but an outright recession still seems unlikely, even as the European and Chinese economies continue to send warning signals.

The technical picture remains as bullish as it gets, and although it’s still early to conclude that we have a major breakout at hand, the fact that the major indices all hit new all-time highs is great news for bulls. The S&P 500, the Nasdaq, and the Dow are all well above their 200-day moving averages, and the benchmarks are also clearly above their rising 50-day moving averages. Small-caps had another relatively weak week. Even though the Russell 2000 finished above both its short- and long-term moving averages, it remains well below its all-time high. While the Volatility Index (VIX) had a crazy session on Friday, the fear gauge closed at its lowest level since early May, and its closing value of 13 is consistent with a healthy bull market.

While market internals continue to improve thanks to the rally, the relative weakness of small-caps is still casting a shadow on the rally. The Advance/Decline line hit more new bull market highs this week, as advancing issues outnumbered declining stocks by a 3-to-1 ratio on the NYSE, and by a 4-to-1 ratio on the Nasdaq. The average number of new 52-week highs rose on both exchanges, jumping to 160 on the NYSE and 143 on the Nasdaq. The number of new lows ticked lower in the meantime, falling to 54 on the NYSE and 65 on the Nasdaq. The percentage of stocks above their 200-day moving average continued to increase thanks to the broad rally, finally closing the week above the 60% level.

Short interest declined significantly in the wake of the trade truce, as the total amount of bearish bets is finally nearing the levels seen before the deep correction last year. Accelerate Diagnostics (AXDX) continues to deliver, and although the stock pulled back on Friday, it still sports a short interest of 51%, so there could be more fuel in its tank. Eidos Therapeutics (EIDX) also remains one of the most bullish stocks and backed by a short interest of 43%, the rally could still continue. Current GorillaPick, Omnicom (OMC), has a very high days-to-cover (DTC) ratio of 14, and since the stock just broke out of a bullish consolidation pattern, a major rally might be ahead.

While the Fed’s rate decision is not scheduled until the end of the month, next week will likely be all about inflation and rate expectations. Fed Chair Jerome Powell will give a speech on Tuesday then testify on Wednesday when the FOMC meeting minutes are also scheduled to come out. In light of the mixed catalysts and the sometimes confusing communication by the Central Bank, we could be in for a wild ride. The Consumer Price Index (CPI) and the Producer Price Index (PPI) will be released on Thursday and Friday respectively, and the European Central Bank’s (ECB) meeting minutes might also make waves on Thursday. The weakness in small-caps is still the only major concern for bulls here, but should the Russell finally join the rally in earnest, the second half of the year could be something to remember. Stay tuned!


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