State of the Stock Market Analysis for the Week Ending on August 4th, 2019 (Trade Talks with China | State of the Stock Market 08-04-19)

All You Need Is Jobs

While we expected a tumultuous week for stocks, due to the Fed’s rate decision and it being earnings season, the trade talks with China caught most investors by surprise. As for earnings, the overall positive picture has not changed, and it seems that bulls once again dodged a bullet, as corporate profits increased in the second quarter, proving most analysts wrong. Even the ‘hawkish rate cut’ by the Fed wasn’t enough to break the rising trend on Wall Street, as stocks quickly recovered on Thursday, just to get smacked lower yet again, following President Trump’s tariff announcement. Since the Chinese side was quick to answer, hinting at retaliatory measures, it’s no surprise that the week ended on a decisively negative note.


Looking just at the domestic economic trends, this week’s rate cut might be puzzling for some, especially given the fact that the major indices were just off their all-time highs ahead of the decision. That said, the mixed economic numbers of the week provided further evidence of the slowdown in the manufacturing sector, as the ISM manufacturing PMI, the Chicago PMI, and construction spending all missed expectations. Despite the negative surprises and given the strength of the consumer economy, the Gorilla tends to agree with Fed Chair Jerome Powell, in that starting an aggressive easing cycle is not necessary just yet. On the consumer side, the CB Consumer Confidence number blew consensus estimates away, the government jobs report was in line with expectations, with wage growth even outpacing the estimates, while the Core PCE Price Index, personal spending, and personal income all remained strong.


The technical picture deteriorated somewhat because of the turmoil in the latter of the week, but the majority of the key trend indicators continue to be in line with a healthy bull market. The S&P 500, the Nasdaq, and the Dow are still well above their rising 200-day moving averages, but the indices finished the week near their rising 50-day moving averages, and the advancing short-term trend may now be in danger. Small-caps remained relatively weak, as the Russell 2000 fell below its 50-day moving average and got very close to its declining 200-day moving average amid the risk-off shift. The Volatility Index (VIX) hit 20 for the first time since early-May on Friday, and although it closed the week below the key level, it still rose by almost 50% in one week.


Market internals also took a hit due to the late-week plunge, especially since small-caps remained relatively weak. However, the most reliable measures still only point to an ordinary correction in the ongoing bull market. The Advance/Decline line pulled back from its fresh all-time high together with the major indices, as decliners outnumbered advancing issues by a 4-to-1 ratio on the NYSE, and by a 5-to-1 ratio on the Nasdaq. The average number of new 52-week highs fell sharply on both exchanges, plunging to 73 on the NYSE and 82 on the Nasdaq. The number of new lows rose in the meantime, reaching 98 on the NYSE and 113 on the Nasdaq. The percentage of stocks above their 200-day moving average took a nosedive in the second half of the week, but the measure still finished above 50% on Friday.


Short interest increased substantially in the second half of the week, as investors rushed to hedge their exposure due to the increased trade-related uncertainty. MiMedx Group (MDXG) defied the market-wide trend, edging higher toward the end of the week, and with its short interest still at 60%, the stock could be among the leaders of a bounce. National Beverage (FIZZ) also had a bullish week, hitting its highest level since early-June, and since the stock sports a short interest of 52%, a larger scale move could soon be underway. Hormel Foods (HRL) continues to trade in a bullish consolidation pattern, despite this week’s sell-off, and since the stock has a very high days-to-cover (DTC) ratio of 15, a breakout could be ahead in the coming weeks.


Compared to this week’s crazy schedule, we are in for a very quiet week, at least as far as economic releases and quarterly reports are concerned. The ISM non-manufacturing PMI will come out on Monday, and the PPI report is scheduled for release on Friday, but between those releases, only the JOLTS job openings number will come out on Tuesday. Given the post-Fed spike in volatility, traders are unlikely to be bored, and any new development concerning the tariff skirmish could unleash wild swings in stocks and Treasuries. While there will not be any central bank meetings next week, but the People’s Bank of China could decide to intervene again, as Chinese assets and the yuan, in particular, were hit hard toward the end of the week. This could cause a relief rally in risk assets. Stay tuned!


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