While we have not seen sustained trends this year in the stock market, it seems that something changed this week, and we finally might have a valid technical breakout on our hands. While there were plenty of negative headlines this week that could have triggered a pullback concerning the weak economic releases, including the verbal skirmish between the President and the Fed, and the lack of progress on the trade talks with China, stocks remained stable. Although the large-cap indices did not make much progress until Friday, buyers stepped in following every intraday or overnight dip. Most of the sectors trod water this week, but energy stocks suffered a blow due to regulatory fears, while utilities benefited from the slight global risk-off shift in the middle of the week, and industrials and tech stocks also shined.
We had a very busy week in terms of economic releases, both domestically and internationally, with the weak Chinese indicators in particular causing turmoil in risk assets. Retail sales and industrial production both missed bigtime in China, but the most important U.S. measures were all higher-than-expected, confirming the divergence between the two countries. The Consumer Price Index (CPI) and the Producer Price Index (PPI) both confirmed the strong domestic demand, especially in an international comparison, while retail sales also rebounded. Industrial production declined yet again, in line with the overseas trends in the sector, and the weekly number of new jobless claims also showed some weakness, coming in at 225,000, the measure’s highest reading since late-June.
The technical picture is still as good as it gets on Wall Street, and despite this week’s sideways drift, the major indices are still in rising trends in both the short and long-term timeframes. The S&P 500, the Nasdaq, and the Dow are still well above their rising 200-day moving averages, and the benchmarks also closed the week above their steeply rising 50-day moving averages. Small-caps drifted lower this week, pulling back following several bullish weeks, and the Russell 2000 is well above both of its moving averages, and its short-term indicator is back above its long-term indicator. While stocks settled down this week, the Volatility Index (VIX) spiked higher several times due to the fears of a failed breakout and a “bull trap,” only to close the week flat, near the 12 level.
Market internals continued to diverge in a negative fashion due to the weakness in small-caps, but there is still not enough evidence at this point to support an orderly pullback. The Advance/Decline line edged lower for the second week in a row, even as advancing issues outnumbered decliners by a 3-to-2 ratio on the NYSE, and by a 2-to1 ratio on the Nasdaq. The average number of new 52-week highs dropped on both exchanges, falling to 68 on the NYSE and 77 on the Nasdaq. The number of new lows increased substantially in the meantime, rising to 54 on the NYSE and 96 on the Nasdaq. The percentage of stocks above their 200-day moving average also declined in the quiet environment, dipping below 60% yet again, and closing just above that key level.
Short interest edged higher this week as the most-shorted issues underperformed, but the total number of bearish bets remains very low thanks to the rally of the past five weeks. MiMedx Group (MDXG) drifted sideways throughout the week, just below a key resistance level, and since the stock still has a short interest of 62%, a breakout could be ahead. Current GorillaPick, Hormel Food (HRL) outperformed the broader market this week and hit a one-month high, and since the stock still sports a very high days-to-cover (DTC) ratio of 18, it could continue to shine in the coming weeks. CarMax (KMX) also has a DTC ratio of 17, and the stock hit a new all-time high on Thursday after three weeks of consolidation, so shorts could be in big trouble again.
This week’s important economic indicators failed to make major waves in the stock market, and next week, we will have a much calmer week in that regard, so politics and technical factors will likely dominate. That said, we will have several releases coming out from the housing market, such as the NAHB Housing Market Index on Monday, building permits and housing starts on Tuesday, and existing home sales on Thursday. The FOMC meeting minutes will be out on Wednesday, while the Philly Fed Index will also come out on Thursday, and the week will end with the release of the global manufacturing and services PMIs. The trade talks with China continue to be the main risk factor for investors, and bulls are hoping that we will finally get an official confirmation that the “phase one” deal will be signed this year. Stay tuned!
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