State of the Stock Market Analysis for the Week Ending on May 26th, 2019 (A Tumultuous Week for the Stock Market | State of the Stock Market 05-26-19)
We had a tumultuous week in the financial markets, with the escalating trade war, the fallout of the Huawei ban, the continued Brexit chaos, and the steep drop in the price of oil all causing turmoil on Wall Street. The major indices all but erased last week’s rally on Thursday, since the odds of a prolonged trade war increased. Despite the escalation, the President said that he still expects a ‘quick deal’ with China, which could include a compromise on Huawei as well, so we shouldn’t rule out another possible rapid shift in investor sentiment, and, in turn, a sustained rally in stocks. While the highly anticipated FOMC meeting minutes failed to provide any meaningful surprises, the Treasury market turned volatile, and long-dated yields plunged to their lowest levels since 2017 as more and more investors are betting on the start of an easing cycle before the end of this year.
We had a relatively quiet week in terms of economic data, but the mostly bearish indicators added to the pressure on stocks, while also weighing on Treasury yields. After weeks of positive surprises, we received warning signs from the manufacturing sector, since the durable goods report was weaker-than-expected and the Markit Manufacturing PMI also missed the consensus estimate together with the Services PMI. That said, the sector remains stable, despite the negative global trends, which were confirmed yet again by the European Manufacturing PMIs. The housing sector, which showed signs of life in March also saw a decline in activity, with both new and existing home sales coming in below-forecast, but since mortgage rates remain stubbornly low, demand should be healthy in the coming months.
The technical picture remains mixed on Wall Street, with some of the key short-term indicators flipping back to bearish due to this week’s dip. The long-term trend is still undoubtedly positive, and the S&P 500, the Nasdaq, and the Dow are all above their flat 200-day moving averages, even though the tech benchmark got close to its long-term indicator due to the turmoil surrounding Huawei. All three of the major indices closed below their 50-day moving average again, with the S&P 500 clearly being the strongest among them, from a short-term perspective. Small-caps were hit hard amid the global risk-off shift, and the Russell 2000 finished the week below its short and long-term moving averages for the second week in a row. On a positive note, the Volatility Index (VIX) is not confirming the correction in stocks, as the fear gauge remains well below the 20 level and its high from two weeks ago, closing near the 16 level again on Friday.
Despite the continued weakness in small-caps, market internals have been stable all week long, and that, together with the positive divergence in the VIX is a great sign for bulls. The Advance/Decline line remains just below its bull market high, even as declining issues outnumbered advancing stocks by a 3-to-2 ratio on the NYSE, and by a 3-to-1 ratio on the Nasdaq. The average number of new 52-week highs fell on both exchanges, dropping to 96 on the NYSE and 54 on the Nasdaq. The number of new lows ticked higher in the meantime, rising to 108 on the NYSE and 125 on the Nasdaq. The percentage of stocks above their 200-day moving average declined for the second week in a row, hitting its lowest level since March, closing the week near 46% following Thursday’s broad selloff.
Short interest was stable for the second week in a row, despite the volatile days, which could mean that the ‘smart money’ is not concerned about a prolonged trade war as much as the general public. While Revlon (REV) failed to continue its recovery in the face of the broader correction, it remained relatively stable this week, and given its short interest of 45%, it could be among the leaders in the coming weeks. Current GorillaPick, Sempra Energy (SRE) keeps on delivering for bulls, and in light of this week’s deal with Saudi giant Aramco and its high days-to-cover (DTC) ratio of 12, the stock could be headed even higher. Omnicom (OMC) has an even higher DTC ratio of 15, and following weeks of choppy trading, the stock could be ready to push higher again.
The holiday-shortened week will be a busy one with regards to economic releases, and the second half of the week could be especially crucial for investors. The CB Consumer Confidence number and the Case-Shiller Housing Price Index will be released on Tuesday. The Richmond Manufacturing Index will come out on Wednesday, while the second reading of the first quarter GDP will highlight Thursday’s session. The Core PCE Price Index, the Fed’s preferred inflation measure, and the Chicago PMI are scheduled for Friday. Despite the Fed’s patient approach, another lower-than-expected price index could push Treasury yields even lower. European assets could turn volatile in the aftermath of the European Parliamentary elections, and we wouldn’t be surprised to see yet another plot twist in the trade war saga, so we could be in for another action-packed week. Stay tuned!
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