State of the Stock Market Analysis for the Week Ending on September 2nd, 2018 Even With Ups and Downs, Week Ends on Positive Note 9-2-18)
The past week will likely go down in history for several reasons, although the major indices didn’t cover much ground. The longest bull market in U.S. history reached record heights again, as the Nasdaq and the S&P 500 not only surpassed the 8,000 and 2,900 marks, but they did so amid a widening financial crisis in emerging markets. Argentina and Turkey are in the epicenter of the currency-driven crunch. While investors are liquidating their holdings in the segment, a slew of other countries are also facing troubles. The U.S.-Chinese trade spat is making things worse for the vulnerable nations, and with further Fed rate hikes on the horizon, the underlying yield pressures will likely get worse.
Economic numbers were generally positive this week, with welcomed strength across most sectors, even though we saw continued weakness in the housing market. Yield pressures are likely behind the slowdown in housing. Pending home sales missed expectations, while the Case-Shiller Housing Price Index also came in below the consensus estimate. There was no shortage of positive surprises, though, as GDP growth was revised higher, the Chicago PMI beat expectations, and the CB Consumer Confidence number unexpectedly surged to a new 18-year high. Although the core PCE Index was in-line with expectations, it still made headlines since the inflation measure surpassed the Fed’s mandate on a yearly basis.
The technical picture is as bullish as it gets, with the major indices in strong advancing trends according to the most reliable indicators. The Dow, the Nasdaq, and the S&P 500 are all way above their 50-day moving averages, and although the Dow still lags the other two benchmarks, it is also close to hitting a new all-time high. The Russell 2000 hit marginal new highs as well, but the small-cap index lost some of its momentum in the second half of the week, as the market got slightly stretched, following the strong multi-week rally. The Volatility Index (VIX) traded in-line with the price action in the major indices, drifting sideways in the first half of the week and popping higher later on, to close near 13.5 on Friday.
Market internals are still consistent with a roaring bull market, even though most of the key indicators turned lower toward the end of the week. The Advance/Decline line is very close to its bull market highs, despite the late-week pullback, as advancing stocks still outnumbered declining issues 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 was virtually unchanged on both exchanges, edging lower to 118 on the NYSE, and increasing to 158 on the Nasdaq. The number of new lows rose in the meantime, ticking higher to 37 on the NYSE, and 39 on the Nasdaq. On a positive note, the percentage of stocks above their 200-day moving averages increased and closed at 55%, but that is still a fairly low figure, given the record highs in the indices.
The most-shorted issues performed in-line with the broader market, as the slight risk-off shift sparked some hedging among institutional investors toward the end of the week. Accelerate Diagnostics (AXDX) hit a new 4-month high last week, and the stock could just be starting a major move, given its short interest of 45%. The short squeeze in iRobot (IRBT) paused after 15 straight advancing sessions, but the shallow correction and its short interest of 40% are not good signs for bears. Hormel Foods (HRL) is still in the top five list of having the highest days-to-cover (DTC) ratios among large-caps, with a reading of 17, and the fact that buyers quickly erased the recent pullback could point to a looming breakout.
The first week of September is usually a crucial one for investors, similarly to the first week of January, as major long-term moves often start just after the end of the summer season. The beginning of the month will also be busy with regard to economic releases, as we have important reports coming out on every day of the holiday-shortened week. The ISM manufacturing and non-manufacturing PMIs will be released on Tuesday and Thursday, respectively, the monthly trade balance figure will be published on Wednesday, while the much-awaited government jobs report will close the week as usual. The ongoing trade talks and the emerging market crisis are also adding uncertainty to the “mix,” and with all that in mind, it should make for a very interesting week on Wall Street. Stay tuned!
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