State of the Stock Market Analysis for the Week Ending on July 27th, 2019 (A Hectic Week for Investors | State of the Stock Market 07-27-19)

All You Need Is Jobs

The busiest week of the earnings season turned out to be a hectic one for investors. Even though profits, in general, were better-than-expected in the second quarter, there were notable misses as well. While the Nasdaq and the S&P 500 hit new all-time highs on Wednesday and Friday, the Dow was under pressure due to the negative earnings from Caterpillar (CAT) and Boeing (BA), combined with Johnson & Johnson’s (JNJ) continued weakness. The European Central Bank’s (ECB) monetary meeting was the most important event of the week, ahead of next week’s crucial Fed decision. ECB President Mario Draghi hinted at further rate cuts and other easing measures, which all but cemented a rate cut by the FOMC as well.

We had another mixed week of economic releases, especially from a global perspective. However, the domestic economy proved its resilience yet again, with the advance GDP number coming in at 2.1%, and even the internationally weak manufacturing sector providing a few positive surprises. The durable goods report beat expectations across the board, with core sales rising by the most in four months. So, while the Richmond Manufacturing Index plunged below zero, in light of last week’s blowout Philly Fed Index, it’s still too early to call a manufacturing recession. That said, the Markit Manufacturing PMI also missed, and we received dismal PMIs from the Eurozone yet again. The weekly number of new jobless claims remained very low, but on a negative note, the housing market continues to struggle, with new and existing home sales both coming in below consensus estimates.

The major indices are at or just below their all-time highs, so it’s no surprise that the key trend indicators are still bullish, even though the benchmarks failed to gain significant ground over the past two weeks. The S&P 500, the Nasdaq, and the Dow are still well above their rising 200-day moving averages, and the indices are also above their steeply rising 50-day moving averages as well. Small caps continue to lag the broader market despite a “one-day wonder” surge on Wednesday, but the Russell 2000 is still above its declining short-and long-term moving averages. The Volatility Index (VIX) had a hectic week, as the fear gauge hit a two-week high on Monday, just to dip below 12 for the first time since April on Thursday, before closing the week just above 12 on Friday.

Market internals have improved somewhat following weeks of deterioration, but with small caps still being relatively weak, some of the most reliable measures continue to show negative divergences. The Advance/Decline line finally hit a new bull market high this week, as advancing issues outnumbered decliners by a 5-to-2 ratio on the NYSE, and by a 3-to-1 ratio on the Nasdaq. The average number of new 52-week highs rose significantly on both exchanges, rising to 155 on the NYSE and 167 on the Nasdaq. The number of new lows was stable in the meantime, edging lower to 61 on the NYSE and 63 on the Nasdaq. The percentage of stocks above their 200-day moving average bounced back after two negative weeks, and the measure closed the week just above the 62% level.

Short interest continues to be very low, despite the uncertainty regarding the Fed’s rate decision and the global economic weakness, as sentiment remains bullish on Wall Street. Battered online retailer Overstock (OSTK) is up by almost 100% since mid-June, and since the stock has a short interest of 56%, bears could be in for more pain in the coming weeks. Dillard’s (DDS) also spiked higher recently thanks to an investment by legendary fund manager David Einhorn, and given the stock’s short interest of 46%, a short squeeze may be in the cards. CarMax (KMX) continues to show relative strength following four bullish months, and with the stock’s days-to-cover (DTC) ratio at 12, the stock may be headed for new all-time highs.

Even though all eyes will be on the trade talks with China and the Federal Reserve next week, the Bank of Japan and the Bank of England will also hold their monetary meetings and there are still have crucial earnings reports yet to be released. Apple (AAPL), Verizon (VZ), oil giants Exxon (XOM) and Chevron (CVX), Procter & Gamble (PG), Mastercard (MA), and Pfizer (PFE) will highlight the week, and in the wake of Caterpillar’s report, Apple’s Chinese figures will be closely watched by analysts. As for economic releases, the Core PCE Price Index and the CB Consumer Confidence number will be out on Tuesday, the ISM manufacturing will be released on Thursday, and the busy week will end with the government jobs report. Fed Chair Jerome Powell confirmed that the Central Bank is ready to cut rates if needed, and although the domestic trends wouldn’t necessarily support an easing move, the serious global troubles make a rate cut very likely on Wednesday. Stay tuned!


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