State of the Stock Market Analysis for the Week Ending on June 23rd, 2019 The Rally Continues | State of the Stock Market 06-23-19)
While last week’s consolidation caused many investors to doubt the recovery following the correction in May, the resilience that equities showed to the negative headlines correctly predicted the continuation of the rally. The Fed’s dovish shift, which was in-line with the Treasury market’s expectations, gave a much-needed boost to stocks, but technicals have been consistent with an ongoing bull market throughout 2019. President Trump’s announcement regarding a meeting with Chinese leader Xi next week also improved investor sentiment, even though the escalating tension between Iran and the U.S. caused some turmoil. Treasury yields hit new multi-year lows across the curve, as the 10-year yield dipped below 2% for the first time since late-2016.
While economic releases took the backseat this week due to the Central Bank bonanza, we still received important indicators from several sectors. The housing market sent mixed signals yet again. Although housing starts beat the consensus estimate, the NAHB Housing Market Index missed expectations, despite the help of the declining mortgage rates. The Philly Fed Index missed by a wide margin, and although the indicator still points to weak expansion in the sector, it seems that the global slowdown may finally be starting to affect the domestic market. The CB Leading Index also provided a negative surprise, and even though the weekly number of new jobless claims was lower-than-expected, all in all, the bearish releases likely contributed to the steep drop in Treasury yields.
The technical picture is now very solid thanks to this month’s strong recovery, and the major indices could very weel be headed for a major technical breakout, which could lead to higher prices in the second half of the year. The S&P 500, the Nasdaq, and the Dow are all well above their flat 200-day moving averages, and now, the benchmarks are clearly above their 50-day moving averages as well. Small-caps continue to show relative weakness, casting a shadow on the rally, but the Russell 2000 also closed the week above both its short and long-term moving averages. The Volatility Index (VIX) had an eventful week, since the fear gauge fell as low as 13 following the Fed decision, but spiked back to 16 later on, just to finish near the 15 level on Friday.
Market internals remained consistent with the price action on Wall Street, although the weakness in small-caps took its toll on some of the most reliable measures. The Advance/Decline line continued to surge to new bull market highs, since advancing issues outnumbered declining stocks by a 6-to-1 ratio on the NYSE, and by a 5-to-1 ratio on the Nasdaq. The average number of new 52-week highs rose for the second time in a row on both exchanges, climbing to 170 on the NYSE and 125 on the Nasdaq. The number of new lows continued to decrease as well, falling to 69 on the NYSE and 87 on the Nasdaq. The percentage of stocks above their 200-day moving average increased significantly again, but Friday’s 56% is still far away from signaling a raging bull market.
Short interest declined in the aftermath of the Fed decision since bears exited their bets in droves due to the dovish shift by the Central Bank. Insurance provider Trupanion (TRUP) is having an excellent month, so far, with the stock gaining more than 20% in three weeks, and with its short interest at 38%, the stock could be in for more gains in the coming weeks. Match Corp. (MTCH) continues to trade sideways following its surge in May, and since the stock sports a short interest of 37%, the consolidation could end with a bang. Henry Schein (HSIC) hit a marginal new all-time high this week, and given its very high days-to-cover (DTC) ratio of 13, shorts could send the stock well above its recent high.
All eyes will be on the G20 meeting in Japan next week, since following this week’s announcement regarding the second Trump-Xi meeting, the odds of the trade war moving in the right direction have increased. While a final deal is highly unlikely, stopping the escalation would be a very positive sign for investors. As for economic releases, there will be key releases coming out almost every day except Monday. The CB Consumer Confidence number will be out on Tuesday, the durable goods report is scheduled for Wednesday, the final GDP print will be released on Thursday, while the week will end with the Core PCE Price Index, the Chicago PMI, and personal spending. The G20 meeting will start on Thursday, so volatility will likely pick up toward the end of the week, so investors should be prepared for wild swings, especially during the pre-market sessions. Stay tuned!
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