State of the Stock Market Analysis for the Week Ending on May 12th, 2019 (Deepest Correction of the Year | State of the Stock Market 05-12-19)

All You Need Is Jobs

Volatility skyrocketed this week on Wall Street, as the major indices experienced their deepest correction of the year. The volatile dip was caused by the renewed trade worries that took investors by surprise following weeks of positive reports regarding the negotiations with China. The benchmarks all hit their lowest levels in more than a month, while Treasury yields plummeted as well, and risk assets were under pressure across the globe. We saw the wildest intraday swings in stocks since December, as the often-contradicting headlines caused sudden shifts in investor sentiment throughout the week. On Friday, the President confirmed that the talks will continue, which was enough to cause a short squeeze ahead of the weekend.

While we had a relatively calm week regarding economic releases, the few key reports all provided surprises. The core Consumer Price Index (CPI) and the core Producer Price Index (PPI) both missed the consensus estimates, confirming the easing inflationary pressures in the domestic economy. Even though the headline PPI was in-line with expectations, inflation remains contained, which gives the Fed flexibility regarding its monetary policies. Although the new jobless claims number was higher-than-expected for the second week in a row, the JOLTS Job Openings number was well above forecast, as the job market remains tight. The trade deficit narrowed unexpectedly in April, and while that is likely mostly the product of the strong dollar, the effect of the trade tariffs is also apparent.

The technical picture, at least from a short-term perspective, deteriorated due to this week’s pullback, but the major indices are still close to their all-time highs, and the rising long-term trends are in no danger. The S&P 500 and the Nasdaq closed the week slightly above their 50-day moving averages, while being well clear of their 200-day moving averages, but the lagging Dow finished below its short-term indicator and even touched its long-term indicator on Friday. Interestingly, the Russell 2000 also closed above both of its moving averages, despite being well below its all-time high, which is a positive sign for the coming weeks. The Volatility Index (VIX) hit a four-month high near the 24 level this week, but thanks to Friday’s bounce, it finished near 16, as tensions eased ahead of the weekend.

Market internals remained strong in the face of the broad selloff, and while that doesn’t mean that the correction won’t continue, it confirms that the bull market is alive and well. The Advance/Decline line pulled back together with the major indices, as declining issues outnumbered advancing stocks by a 3-to-1 ratio on the NYSE, and by a 2-to-1 ratio on the Nasdaq. The average number of new 52-week highs declined on both exchanges, falling to 77 on the NYSE and 63 on the Nasdaq. The number of new lows jumped higher in the meantime, increasing to 49 on the NYSE and 70 on the Nasdaq. The percentage of stocks above their 200-day moving average fell briefly below the 50% level, but the measure quickly recovered and closed the week above 52%.

Short interest increased significantly due to the trade-related uncertainty, but thanks to the bullish earnings season, the total amount of bearish bets remains near historic lows. Revlon (REV) defied the market-wide trends this week, as it continued to recover from its plunge in March, despite its short interest of 45%. Tootsie Roll (TR) also has a short interest of more than 40%, and since the stock remained relatively strong during this week’s correction, the rally that started in October could soon resume. Current GorillaPick, Sempra Energy (SRE), finished the week on a positive note, getting very close to its all-time high on Friday and since the stock has a very high days-to-cover (DTC) ratio of 13, a short squeeze is now likely in the cards.

The tariff war will likely remain at the center of attention next week, and the companies with a larger-than-average exposure to China’s market, such as Apple (AAPL), Caterpillar (CAT), and Boeing (BA) will probably see the most volatility again. China is expected to introduce retaliatory measures in the wake of the tariff increases, but the fact that the talks haven’t broken down this week likely means that a deal will be struck in the coming months. As for economic releases, we will have a calm start to the week, but there will be key reports coming out every day, starting on Wednesday. The retail sales report and industrial production will highlight Wednesday’s session, the Philly Fed Index, building permits, and housing starts will be out on Thursday, while the Michigan consumer sentiment number will wrap up the eventful week. Stay tuned!


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