State of the Stock Market Analysis for the Week Ending on August 11th, 2019 (Positive Outlook for August! | State of the Stock Market 08-11-19)
Although the summer months are usually less active on Wall Street, August could turn out to be one of the most volatile months of the year. The escalating trade tension between the U.S. and China was behind the turmoil across asset classes, and this week has been all about the Chinese yuan. The currency broke the psychologically important 7 level against the dollar, and the fact that the People’s Bank of China (PBOC) let that happen triggered a massive risk-off shift on Monday. While stocks recovered after their worst session of the year, bulls are still not out of the woods, and we could be in for more volatile days in the coming weeks.
Economic releases took a backseat this week, since all eyes were on the trade-related developments, but the few key reports that came out all provided major surprises. The ISM non-manufacturing PMI came in well below the consensus estimate, which raises the odds of a broader slowdown in the domestic economy. The services sector has been holding up well in the face of bearish global pressure and troubles in manufacturing, and although the labor market continues to show healthy growth, the weak PMI could indicate more problems ahead. The much worse-than-expected core Producer Price Index (PPI) also confirmed the slowdown, and Treasury yields, which were already under severe pressure due to the trade worries, hit new multi-year lows this week, as rate cut odds surged.
The technical picture is mixed in the wake of the volatile swings, but even though the short-term trend turned negative on Wall Street, the bull market is still alive and well, and the long-term trend indicators are all pointing higher. The S&P 500, the Nasdaq, and the Dow are still well above their rising 200-day moving averages, but the indices finished slightly below their rising 50-day moving averages, despite the late-week rally. Small-caps continue to be worryingly weak, and due to Friday’s dip, the Russell 2000 closed the week below its 50-and 200-day moving averages. The Volatility Index (VIX) spiked as high as 25 on Monday, its highest level since late-December, but thanks to the improving investor sentiment, the fear gauge dropped below 20 and closed near 18 on Friday.
Market internals remained weak all week long, despite the healthy bounce, as the continued weakness in small-caps affected the most reliable breadth measures negatively. The Advance/Decline line remained well below its recent bull market high, as decliners outnumbered advancing issues by a 2-to-1 ratio on the NYSE, and by a 4-to-3 ratio on the Nasdaq. The average number of new 52-week highs declined again on both exchanges, falling to 45 on the NYSE and 53 on the Nasdaq. The number of new lows exploded higher in the meantime, jumping to 169 on the NYSE and 191 on the Nasdaq. The percentage of stocks above their 200-day moving average took another hit on Monday, and although the indicator recovered together with the broader indices, it still closed the week below 50%.
Short interest ticked higher for the second week in a row, as many investors hedged themselves against the increasing trade-related uncertainty and effects of the global economic slowdown. Following two months of consolidation, Gogo Inc. (GOGO) jumped higher thanks to its better-than-expected earnings report, and with its short interest at 63%, the stock could be ready for a sustained rally. MiMedx Group (MDXG) continues to show relative strength, and with its short interest also being above 60%, a short squeeze may be in the cards. Current GorillaPick, Sempra Energy (SRE) defied the turmoil and closed the week in the green, and since the stock has a very high days-to-cover (DTC) ratio of 15, it could be ready to resume its historic rally.
We will have a relatively busy week in terms of economic releases, but the trade war will likely steal the show again, especially if the Chinese yuan remains under pressure. That said, Tuesday’s Consumer Price Index could prove to be crucial for investors in light of this week’s huge PPI miss. The retail sales report, the Philly Fed Index, industrial production, and the Empire State Manufacturing Index will all be released on Thursday, while on Friday, we will have housing starts, building permits, and the Michigan Consumer Sentiment number coming out. While short-term technicals turned bearish this week, the major domestic indices clearly outperformed their international peers, and should sentiment improve further, that strength could be the basis of another leg higher in the bull market. Stay tuned!
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