State of the Stock Market Analysis for the Week Ending on June 2nd, 2019 Too Much for the Bulls | State of the Stock Market 06-02-19)

All You Need Is Jobs

While several indicators pointed to an impending bottom in stocks over the past two weeks, the worrisome trade-related headlines and the continued economic weakness in Europe and China were too much for bulls to handle. The massive drop in Treasury yields also spooked investors, as safe-haven flows pushed rates to their lowest levels since late-2017. The surprising announcement regarding the new 5% tariff on Mexican goods sent global risk assets spiraling lower on Friday, casting a shadow on the negotiations with China as well. The major indices all hit fresh multi-month lows during the week, with consumer goods losing the most ground amid the broad risk-off shift. On a positive note, tech stocks performed relatively well throughout the week, despite the fears of a major Chinese retaliatory move in response to the Huawei ban.

While the evidence confirming the global economic slowdown is mounting, especially in the manufacturing sector, the key domestic indicators are still showing stability. This week, we saw improvements in several sectors, and the consumer economy still seems to be enjoying strong tailwinds. The CB Consumer Confidence Index was much higher-than-expected in May, coming in at 134.2, close to its recent two-decade high. Personal income and personal spending also beat the consensus estimates, and the Core PCE Price Index confirmed the strong demand as well. The Richmond Manufacturing Index and the Chicago PMI both missed expectations, and the housing market also sent further warnings signs, despite the low mortgage rates and the easing price pressures.


The technical picture deteriorated further due to the broad correction, and the short-term trend remains clearly bearish on Wall Street, although the bull market is still in no danger. The S&P 500, the Nasdaq, and the Dow are now all below their flat 200-day moving averages, although apart from the industrial average, the benchmarks are very close to their long-term indicators. The indices are still well below their 50-day moving averages, and the Russell 2000 remains below both its short and long-term indicators, as small-caps continue to lag the broader market. The Volatility Index (VIX), on the other hand, continues to show a strong positive divergence, staying below its recent high and closing the week near the 19 level.


This week’s sell-off also hit market internals. However, while some of the most reliable measures shifted to negative, most of the readings are still consistent with an ongoing bull market. The Advance/Decline line hit its lowest level since early-April, as declining issues outnumbered advancing stocks by a 4-to-1 ratio on the NYSE, and by a 3-to-1 ratio on the Nasdaq. The average number of new 52-week highs declined on both exchanges yet again, dropping to 60 on the NYSE and 50 on the Nasdaq. The number of new lows surged higher in the meantime, rising to 179 on the NYSE and 177 on the Nasdaq. The percentage of stocks above their 200-day moving average continued to decline for the third week in a row, and the measure dipped below 40%, closing the week at 36%.


Short interest rose due to the sharp risk-off shift this week, as investors hedged themselves against a prolonged trade war, with the companies most exposed to China lagging the major indices. (CVNA) treaded water in the face of the market-wide dip, and following three corrective weeks, the stock might be ready to resume its rally, since its short interest is still above 40%. Sea Limited (SEA) also has a very high short interest of 40%, and after pulling back from a new all-time high, bulls could be back in control next week. Communication equipment manufacturer Harris (HRS) has a days-to-cover (DTC) ratio of 12, and since the stock drifted sideways this week, shorts could be in trouble as soon as the correction ends.


The first week of June will be packed with key domestic economic releases, and there will also be plenty of international catalysts that could cause wild moves in stocks and bonds alike. The week will kick off with the ISM Manufacturing PMI on Monday, factory orders will be out on Tuesday, while the ISM non-manufacturing PMI will be released on Wednesday. Thursday’s session will be highlighted by the European Central Bank’s rate decision and monetary statement, and the week will end with the crucial government jobs report. All eyes will be on hourly wages again, especially in light of this week’s steep drop in Treasury yields. And of course, investors will be looking for clues regarding the trade talks with China following this week’s negative developments. Stay tuned!


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