State of the Stock Market Analysis for the Week Ending on June 30th, 2019 (Nervous Trading on Wall Street | State of the Stock Market 06-30-19)

All You Need Is Jobs

Nervous trading was the name of the game this week on Wall Street, and even though the major indices (at least the Dow and the S&P 500) got back to their all-time highs last week, trade worries continued to weigh on investor sentiment. Although the fact that Trump – Xi meeting was confirmed last week boosted equities and other risk assets, the two sides failed to show flexibility during the week. The contradicting reports regarding the negotiations caused sudden spikes in financial markets. Stocks drifted lower in the quiet but nervous environment until Thursday, but the benchmarks remained within striking distance of their recent highs, as volatility remained relatively low. The last two sessions were positive in the summer-like conditions, and with small-caps finally flexing their muscles, the rally might resume in earnest in July.

The key economic releases leaned bearish this week, with the manufacturing sector showing signs of weakness again. The Richmond Manufacturing Index and the Chicago PMI both missed expectations, and although core durable goods orders were unexpectedly strong, the deterioration is apparent in the globally weak sector. The CB Consumer Confidence Index was also well below the consensus estimate, while personal spending missed as well, but thanks to a sizable revision for the month of April, the measure continues to confirm the healthy underlying trend in the consumer economy. While the final reading of the first quarter GDP and the PCE Price Index were both in-line with expectations, the more forward-looking measures are in agreement concerning the slowdown.


The technical picture remains bullish even after this week’s pullback, and the major indices look ready to tackle their all-time highs in the coming weeks thanks to this month’s explosive rally. The S&P 500, the Nasdaq, and the Dow are all well above their flat 200-day moving averages, and the benchmarks are also clearly above their 50-day moving averages. Small-caps led the late-week bounce on Wall Street, with the Russell 2000 gaining almost 4% in two days, and recapturing both its short- and long-term moving averages, despite the trade-related uncertainty. The Volatility Index (VIX) finished slightly higher as traders hedged against a disappointing G-20 summit, but the fear gauge’s closing level of 16 is still well below the danger zone.


While we saw under-the-hood weakness during this week’s pullback, the most reliable breadth measures all recovered thanks to the Russell-led bounce. The Advance/Decline line hit a new bull market on Friday, as advancing issues outnumbered declining stocks by a 5-to-2 ratio on the NYSE, and by a 4-to-2 ratio on the Nasdaq. The average number of new 52-week highs declined on both exchanges after two positive weeks, falling to 120 on the NYSE and 95 on the Nasdaq. The number of new lows ticked higher in the meantime, rising to 75 on the NYSE and 92 on the Nasdaq. The percentage of stocks above their 200-day moving average increased despite the pullback, and Friday’s 59% is one of the highest readings of 2019.


Short interest was stable following last week’s decline, and the amount of bearish bets is still slightly above the levels seen before last year’s deep sell-off. Accelerate Diagnostics (AXDX) concluded its consolidation in a spectacular way, surging by more than 15% in three days, and with its short interest still at 52%, a major breakout could be ahead for the stock. Eidos Therapeutics (EIDX) had a blowout week as well following a deep correction, and since the stock also sports a high short interest of 40%, it might be headed for a new all-time high. Current GorillaPick, Sempra Energy (SRE), continues to be in a strong bullish trend since its breakout in March, and although the stock pulled back this week, its high days-to-cover (DTC) ratio of 12 could mean that the correction will be short-lived.


While technicals are clearly bullish and all looks set for another leg higher in the bull market, we could have a volatile week in the aftermath of the Trump – Xi meeting. Several key economic indicators will also be released during the holiday-shortened week, with especially the government jobs report being in the spotlight. Following this month’s lackluster report, analysts expect a strong rebound in non-farm payrolls, while the pace of wage growth is also expected to be back at 0.3%. The week will be kicked off by the ISM manufacturing PMI on Monday, while the ISM non-manufacturing PMI is scheduled for Wednesday, just as the ADP payrolls number. Investors should continue to keep a close eye on small-caps, as their relative strength might fuel an explosive bullish move. Stay tuned!


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