State of the Stock Market Analysis for the Week Ending on June 9th, 2019 No Sign of Looming Recession | State of the Stock Market 06-09-19)

All You Need Is Jobs

The busy week started out in a decisively negative fashion, with some of the most valuable companies in the world leading the way lower on Monday. Google parent Alphabet (GOOG), Facebook (FB), Amazon (AMZN), and Apple (AAPL) all tumbled on the reports regarding the DOJ’s anti-trust investigations into them. And despite a late-week bounce, these stocks remained deep in the red for the week. The mixed economic releases and the confusing trade-related headlines could also have weighed on equities, but the favorable technicals and the dovish signals from the Fed triggered a major short-covering rally. The major indices scored a four-day winning streak, gaining about 5% each while hitting three-week highs on Friday.

While the key economic releases were far from bullish this week, and some of the measures even provided sizable negative surprises, there is still no sign of a looming recession. With that in mind, it’s no surprise that equities soared following Fed Chair Jerome Powell’s dovish words, since even the globally weak manufacturing sector continues to expand domestically. The ISM manufacturing PMI was well below the consensus estimate, similar to construction spending, but factory orders declined less than expected. The ISM non-manufacturing PMI, on the other hand, was very strong, even though the key labor market indicators were almost unanimously negative. Non-farm payrolls rose by only 75,000, hourly wages increased by 0.2% in May, while the Challenger job cuts estimate surged higher unexpectedly.

The technical picture improved significantly thanks to one of the best weeks of the year, and while the long-term trend was never in danger, despite the deepest correction of the year, the key short-term trend indicators are still mixed. The S&P 500, the Nasdaq, and the Dow all rocketed back above their flat 200-day moving averages, and the S&P 500 and the industrial average closed the week right at their 50-day moving averages. The relatively weak Nasdaq finished below its short-term moving average, just like the Russell 2000, as small caps are still showing weakness, despite the broad rally. The Volatility Index (VIX) declined in sync with the rally in the major indices, after showing a positive divergence last week, as the “fear gauge” closed just above the 16 level on Friday.

Market internals are also confirming the likely bottom in stocks, and although a few of the most reliable measures are still weaker than they were in April, the overall picture is bullish. The Advance/Decline line got very close to its recent bull market high, outperforming the major indices, as advancing issues outnumbered declining stocks 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 rose significantly on both exchanges, jumping to 161 on the NYSE and 96 on the Nasdaq. The number of new lows decreased in the meantime, falling to 80 on the NYSE and 132 on the Nasdaq. The percentage of stocks above their 200-day moving average also bounced back, moving back close to the 50% level on Friday, closing the week near 48%.

The most-shorted stocks even outperformed the broader market thanks to the easing financial conditions, and short interest declined across the board on Wall Street. Carvana (CVNA) formed a bottom together with the major indices. CNVA closed the week almost 10% higher, while its short interest remains very high at 43%. Sea Limited (SEA) also rose significantly thanks to the broad-based rally, and given the fact that the stock sports a short interest of 41%, there may be more left in the tank for the coming months. Hormel Foods (HRL) had a volatile May, but the stock hit an almost two-month high this week, and given its very high days-to-cover (DTC) ratio of 14, it might be headed even higher soon.

Inflation and the consumer economy will be back at the center of attention next week with regards to economic releases, and following a string of comforting inflation-related figures. The Producer Price Index (PPI) and the Consumer Price Index (CPI) are both expected to show easing price pressures. The PPI will be out on Tuesday, while the CPI will be released on Wednesday, and the highly anticipated retail sales numbers are scheduled for Friday. Sales are expected to bounce back strongly compared to their dismal April readings, and even though this week’s job market indicators were weaker-than-expected, the consumer economy will likely remain strong. That said, trade-related headlines could cause turmoil yet again, but bulls are hoping that the tension between the U.S. and China may finally begin to ease ahead of the G20 summit in Tokyo. Stay tuned!


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