State of the Stock Market Analysis for the Week Ending on July 20th, 2019 (A Quiet and Slightly Bearish Week | State of the Stock Market 07-20-19)

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Following last week’s concerted push to new record highs, the major indices had a quiet and slightly bearish week in typical summer trading conditions. Trading activity was light throughout the week, even though we saw fireworks in pre-market trading and in the opening hours due to corporate earnings. Quarterly earnings reports provided mainly positive surprises with regard to earnings, but a lot of companies lowered their guidance for the next quarter. The financial sector, in particular, saw mixed price action in the wake of the releases. Fed Chairman Jerome Powell reiterated the Central Bank’s dovish stance, and even though the domestic economy continues to expand, the Treasury market is still “pricing in” a rate cut this month.

The key economic releases were mixed this week, and with the divergence between the robust consumer economy and the struggling manufacturing sector getting ever wider, the Federal Reserve is likely in for a challenging period regarding interest rates. The retail sales report beat expectations across the board, with the headline measure and core sales both increasing by 0.4% on a monthly basis, which points to healthy growth in the sector. Industrial production slightly missed the consensus estimate, while the Philly Fed Index blew expectations away, hitting a one-year high. We received mostly bad news from the housing market, because, despite the persistently low mortgage rates, building permits and housing starts both missed expectations, even though the NHIB Housing Market Index was slightly better-than-expected.

While bulls have been taking a breather this week following six weeks of gains, the technical picture remains positive, and the key trend indicators are all pointing higher. The S&P 500, the Nasdaq, and the Dow are all well above their 200-day moving averages, and the benchmarks are also still above their rising 50-day moving averages as well, despite the recent pullback. Small-caps continue to be relatively weak, as the Russell 2000 is still about 10% below its all-time high, lagging its large-cap peers, although it is north of its short-and long-term moving averages. While the Volatility Index (VIX) ticked higher after hitting its lowest level since April last week, it’s still below the danger zone, and Friday’s closing level of 13 is consistent with a healthy bull market.

Market internals deteriorated somewhat due to the broad pullback and the relative weakness of small-caps, and the negative divergences that popped up last week have strengthened. The Advance/Decline line turned lower together with the major indices, as declining issues outnumbered advancing stocks by a 3-to-2 ratio on the NYSE, and by a 4-to-3 ratio on the Nasdaq. The average number of new 52-week highs declined on both exchanges, falling to 121 on the NYSE and 107 on the Nasdaq. The number of new lows increased in the meantime, rising to 65 on the NYSE and 71 on the Nasdaq. The percentage of stocks above their 200-day moving average declined for the second week in a row, dropping below the 60% level for the first time this month.

Although short interest was virtually unchanged this week, we did see some restructuring of the bearish bets due to the ongoing earnings season, despite the light trading activity. Apparel store chain, the Children’s Place (PLC), hit its highest level in two months this week, and with its short interest at 42%, the stock could move higher in the coming weeks. Current GorillaPick, Sempra Energy (SRE) looks poised to resume its historic breakout, as after a month of consolidation bulls are eyeing new all-time highs again, with the stock’s days-to-cover (DTC) ratio still at 15. Fiserv (FISV) also sports a very high DTC ratio of 14, and after hitting a new record high this week, the stock could be in for more gains.

One of the two busiest weeks of quarterly earnings is ahead of us, with three of the five most valuable companies, Amazon (AMZN), Google parent Alphabet (GOOG), and Facebook (F) reporting. Interestingly, all three companies have been under regulatory fire this week, since the European Union’s (EU) new leadership pledged to investigate Amazon’s business practices, while the other two firms were under attack domestically. The economic calendar will be quieter next week, with Thursday’s durable goods report and Friday’s advance GDP print taking the spotlight. Analysts are not expecting growth to match the 3.1% reading from the first quarter, although, in light of the global trends, the domestic economy remains robust, and we could get yet another confirmation of that. Stay tuned!


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