State of the Stock Market Analysis for the Week Ending on May 19th, 2019 (A Global Plunge in Trade? | State of the Stock Market 05-19-19)

All You Need Is Jobs

The major indices hit their lowest levels in six weeks on Monday, due to fears that the trade war with China could escalate further and trigger a global plunge in trade, which could drag the global economy lower as well. While we still don’t know when the negotiations with China will resume, the decision to delay the planned tariffs on European autos by six months boosted investor sentiment in the latter half of the week. With Walmart’s (WMT) better-than-expected quarterly numbers, earnings season is now basically over, and profits surpassed the expectations of most analysts. Even though the key benchmarks finished the week with small losses, the deepest correction of the year could already be over, and the indices could still hit new all-time highs in the coming weeks thanks to the solid fundamentals.

The most important economic releases were mixed this week, but since the more forward-looking measures all provided positive surprises, investors remained optimistic regarding the outlook for the coming quarters. The highly anticipated retail sales report missed across the board, with especially the much weaker-than-expected core sales measure worrying analysts. Since the consumer economy has been the engine of growth amid the global weakness in manufacturing, the fact that the Michigan Consumer Sentiment number hit its highest level in 15 years gave a much-needed boost for bulls. As for the manufacturing sector, industrial production missed expectations, but since the Empire State Index and the Philly Fed Index were both well above consensus estimates, a rebound may be ahead.

The technical picture changed almost daily due to the wild price swings this week, at least with regards to the key short-term indicators. The advancing long-term trend is still in no danger. The S&P 500, the Nasdaq, and the Dow are all above their flat 200-day moving averages, but all three benchmarks closed below their 50-day moving averages, with the lagging industrial average being in the weakest technical position among the indices. The Russell 2000 is also worryingly weak compared to the broader market, as the small-cap index closed clearly below its short and long-term moving averages due to Friday’s dip. The Volatility Index (VIX) remained below its high from the previous week thanks to the improving sentiment, and its closing value of 16 is a safe distance from the key 20 level.

While market internals took a hit on Monday, and the weakness in small-caps weighed on the most reliable measures all week, there are still no signs of any deterioration “under-the-hood.” The Advance/Decline line closed the week near its bull market high, as advancing issues outnumbered declining stocks by a 3-to-2 ratio on the NYSE, and by a 2-to-1 ratio on the Nasdaq. The average number of new 52-week highs increased on both exchanges, rising to 106 on the NYSE and 74 on the Nasdaq. The number of new lows also increased, jumping to 106 on the NYSE and 97 on the Nasdaq. The percentage of stocks above their 200-day moving average fell below the 50% level yet again, and despite the mid-week rally, the measure closed the week at 49%.

Short interest was stable during the week, thanks to the sharp drop in the VIX and improving investor sentiment, but it remains above the levels seen in April due to the lingering trade uncertainty. Gogo Inc. (GOGO) had a great week thanks to its recent earnings report, with the stock hitting its highest level since November. Since it still has a short interest of 60%, the rally could easily continue. While Carvana (CVNA) shed almost 20% after publishing its quarterly numbers this week, the stock recovered well, and in light of its short interest of 50%, the stock looks poised to resume this year’s remarkable advance. Current GorillaPick, Sempra Energy (SRE) kept on pushing higher, hitting new all-time highs toward the end of the week, and since the stock still has a high days-to-cover (DTC) ratio of 13, the advancing trend has a solid foundation.

We will have a relatively calm week regarding economic releases, with the minutes from the latest Fed meeting likely stealing the show on Wednesday. On Monday, Fed Chair Jerome Powell will give a speech after the bell, existing home sales and new home sales will be out on Tuesday and Thursday, respectively, while the core durable goods report will highlight Friday’s session. Barring another huge trade-related surprise, Europe, and especially the United Kingdom will likely be in focus next week. The European Parliamentary elections will take place starting on Thursday, and with the Brexit process still basically being on hold, the vote could spark volatile swings in British assets, and in turn, on Wall Street. With the mixed short-term technicals in mind, investors should pay special attention to the short-term trend indicators and market internals, which could give vital clues regarding the state of the recovery. Stay tuned!


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