State of the Stock Market Analysis for the Week Ending on August 18th, 2019 (Yields in Financial Markets | State of the Stock Market 08-18-19)

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This week was all about Treasury yields in financial markets, as mounting global economic risks, worries regarding China, and a hint about a significant easing package by the European Central Bank (ECB) all put pressure on yields. German rates hit new all-time lows well below the zero level, while the U.S. 30-year yield dipped below 2% for the first time in history. As for the stock market, investors had a hard time following the quick shifts in sentiment, and even though the major indices finished slightly in the red, the week ended on a positive note on Friday. The fact that the Trump administration delayed the implementation of the new trade tariffs for some key electronic and clothing products helped the mood on Wall Street. However, investors should not expect a major breakthrough in the negotiations until the high-level talks resume in September.

We had another busy week of economic releases, both internationally and domestically, and the divergences that have been apparent between the manufacturing and the consumer sector and between the U.S. and rest of the world, have widened further. On the consumer side, the Consumer Price Index (CPI) report and retail sales were better-than-expected, and Walmart’s (WMT) bullish earnings report also boosted the sector. So even though the Michigan Consumer Sentiment number was lower than the consensus estimate, the outlook remains positive. Industrial production came in below forecast, but the forward-looking Philly Fed Index and the Empire State Manufacturing Index painted a brighter picture of the struggling sector. And since building permits rebounded, the housing market could also improve in the coming months.

The technical picture remains mixed following two weeks of volatile trading, and while the bullish long-term trend is intact, stocks are still looking vulnerable from a short-term perspective. The S&P 500, the Nasdaq, and the Dow are still above their rising 200-day moving averages, but the indices are stuck below their flat 50-day moving averages, with the industrial average being in the worst technical position. Although the Russell 2000 hit its lowest level since January on Thursday, small-caps had a terrific Friday session. However, even in the wake of the late-week surge, the index is below both its 50 and 200-day moving averages. The Volatility Index (VIX) had another very active week, and after bouncing around between 18 and 24, it finished near the still-high 18.5 level.

Market internals continue to be weak. Although small-caps are still lagging behind the broader market, some of the measures are starting to show encouraging signs. The Advance/Decline line, for example, bounced back in the volatile environment, even though decliners outnumbered advancing issues by a 4-to-3 ratio on the NYSE, and by a 5-to-4 ratio on the Nasdaq. The average number of new 52-week highs edged lower on both exchanges, falling to 44 on the NYSE and 31 on the Nasdaq. The number of new lows rose in the meantime, increasing to 184 on the NYSE and 195 on the Nasdaq. The percentage of stocks above their 200-day moving average declined yet again, and despite Friday’s rally, the indicator closed the week below the 45% level.

Short interest continued to increase in line with the risk-off sentiment, and the most-shorted stocks lagged the major indices, as investors remained cautious, favoring safe-haven assets amid the turmoil. While Akcea Therapeutics (AKCA) ticked lower this week, it’s still trading in an interesting technical pattern, and should the pullback in stocks end, it could be among the leaders, backed by its short interest of 41%. H&R Block (HRB) also held up well despite the wild swings in the major indices, and since the stock sports a very high days-to-cover (DTC) ratio of 16, it could be ready to move higher in the coming weeks. Iron Mountain (IRM) also has a DTC ratio of 13, and on Friday, the stock hit its highest level in two weeks, which could be the start of a short-covering rally.

After two wild weeks, investors are hoping for a less chaotic second half of the month, and while economic releases will be few and far between next week, the Federal Reserve could provide a few surprises. The FOMC meeting minutes will be out on Wednesday, together with existing home sales, while the Markit manufacturing and services PMIs are scheduled for Thursday, and new home sales will come out on Friday. The FOMC meeting minutes will likely be interesting in light of the two dissenting votes against last month’s rate cut, but the annual Jackson Hole Symposium will be the highlight of the week. The three-day meeting will start on Thursday, and since several crucial decisions have been announced in Jackson Hole before, the Central Bank could react to the recent turmoil in financial markets in a decisive fashion. Stay tuned!


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