Stocks had one of their most active weeks in recent memory, and the major indices all finished in the green for the second week in a row. The first two sessions of the week were mixed, with several previously leading stocks getting hit hard due to a sharp reversal in safe-haven flows, but the second half of the week was clearly bullish across the board. The continued trade optimism, the better-than-expected economic releases, and the monetary easing by the European Central Bank (ECB) all fueled the rally, while the declining odds of a no-deal Brexit also boosted risk assets. On another positive note, this week’s advance was broad-based, especially compared to the rally in July, and the stage seems to be set for a sustained move to uncharted territory on Wall Street.
The key economic releases of the week were mostly bullish again, and even though the European economy continues to send mixed signals, at best, the risk of an outright global recession has decreased substantially in recent weeks. Both the Consumer Price Index (CPI) and the Producer Price Index (PPI) hinted at increased economic activity, as the core PPI and the core CPI were higher-than-expected. Although the JOLTS job openings estimate ticked lower, the weekly number of new jobless claims remains close to its cycle low. The divergence between the consumer economy and manufacturing narrowed somewhat recently, but retail sales beat the consensus estimate yet again, indicating that economic growth will likely remain dependent on consumers in 2019.
The technical picture further improved this week and the major indices are on the verge of a crucial breakout to new all-time highs, but more importantly, more and more stocks are joining the party. The S&P 500, the Nasdaq, and the Dow are still well above their now rising 200-day moving averages, and the benchmarks are also clearly above their rising 50-day moving averages as well. Small-caps exploded higher at the beginning of the week, and thanks to their lofty gains, the Russell 2000 is now also above both its 50 and 200-day moving averages, following months of relative weakness. The Volatility Index (VIX) re-entered its pre-correction range this week, falling below 15 for the first time since late-July, as it closed the week near the 14 level.
Market internals showed improvements for the third straight week, benefiting from the rally in small-caps, and now, even the previously weaker indicators are consistent with a healthy bull market. The Advance/Decline line continued to surge higher thanks to the broad rally, as advancing issues outnumbered decliners by a 6-to-1 ratio on the NYSE, and by a 4-to-1 ratio on the Nasdaq. The average number of new 52-week highs increased on both exchanges, climbing to 198 on the NYSE and 148 on the Nasdaq. The number of new lows collapsed in the meantime, falling to 28 on the NYSE and 41 on the Nasdaq. The percentage of stocks above their 200-day moving average skyrocketed as well, as the indicator hit 62% on Friday, its highest level in almost a year!
Short interest dropped sharply yet again, as the most-shorted issues had one of their best weeks of the year thanks to a host of positive catalysts. Conn’s (CONN) continued higher this week, hitting its highest level since December, and since the stock still has a short interest of 61%, its advance could just be starting. National Beverage Corp. (FIZZ) also has a very high short interest of 56%, and the stock hit a three-month high thanks to the rally in small-caps. The technical breakout could even trigger a short squeeze. Snap-On (SNA) had a blowout week following two bearish months, and since the stock sports an extremely high days-to-cover (DTC) ratio of 20, bears could be in a lot of trouble.
It will be all about the Fed’s rate decision next week, even though there will be a few key economic releases coming out before and after the Wednesday event. The manufacturing sector will be in focus, since industrial production will be out on Tuesday while the Philly Fed Index will be released on Thursday. The U.S. Central Bank is expected to cut its benchmark rate by another 0.25%, and while some analysts were expecting a 0.5% easing step in August, the recent bullish developments make that scenario highly unlikely. The week will likely start on a relatively quiet note, but the Fed’s monetary statement will define the second half of the week. Stay tuned!
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