Market internals took a hit ahead of key government jobs report

Commenting on today’s trading with a focus on government jobs numbers, Gorilla Trades strategist Ken Berman said:

weakness in small-caps government jobs

Tumisu / Pixabay

The fact that the Nasdaq and the Russell 2000 led the way lower on Friday and throughout the week is a negative sign for investors, but the underlying bullish trend is not in danger, despite the nervous week. Tech stocks had an ugly Friday, but all of the key sectors lost ground, and the unexpected trade development could hurt risk assets ahead of next month’s talks between the U.S. and China.

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Stocks finished the week with a clearly bearish session on Friday, and the major indices all closed in the red due to rumors regarding the possible restriction of capital flows to China by the U.S. administration. The Dow lost 71 or 0.3%, to 26,820, the Nasdaq was down 91, or 1.1%, to 7,940 while the S&P 500 fell by 16, or 0.5%, to 2,962. Decliners outnumbered advancing issues by an almost 3-to-1 ratio on the NYSE, where volume was slightly below average.

Government jobs numbers are crucial next week

Although the major indices looked ready to launch an assault against their all-time highs from July following the Fed’s rate cut, this week turned out to be more volatile-than-expected. The mixed trade-related headlines caused wild swings in both directions throughout the week, but the impeachment inquiry against the president had the biggest effect on asset prices, increasing political uncertainty and volatility. The relatively low impact of the attack on the attack on the Saudi oil infrastructure helped somewhat in reducing volatility on Wall Street, although the energy sector got hit hard by the sharp drop in the price of oil. The major indices all finished lower on a weekly basis, with the Nasdaq lagging the broader market, but stocks might still close the usually bearish September in the green.

Economic releases were weaker than in recent weeks, and although only the housing sector sent clearly bullish signals, Treasury yields barely budged, and equities also remained stable. The CB consumer confidence number provided the biggest negative surprise after last month’s unexpected surge, but the Markit services PMI, personal spending, and wholesale inventories were all weaker-than-expected as well. The Core PCE Index ticked lower too, pointing to a slowdown in the consumer economy, although the easing price pressures could mean that more Fed rate cuts are ahead. The durable goods report and the Markit manufacturing PMI both beat the consensus estimates, and while the Richmond Manufacturing Index signaled contraction, the globally weak sector remains stable in the U.S.

Government jobs in focus

Despite this week’s pullback, the technical picture is still clearly bullish on Wall Street, and only the lagging Nasdaq is showing meaningful short-term weakness according to the key trend indicators. The S&P 500, the Nasdaq, and the Dow are still well above their rising 200-day moving averages, but the benchmarks closed the week in the vicinity of their 50-day moving averages, with the tech benchmark finishing below its short-term indicator. Small-caps were worryingly weak throughout the week, and while the Russell 2000 started out the month with a strong rally, it closed the week back below both its 50- and 200-day moving averages. The Volatility Index (VIX) had a very active week due to the political uncertainty and the trade-related fears, and the ‘fear gauge’ closed near 18 on Friday, its highest level since the first days of the month.

Market internals took a hit due to the weakness in small-caps, but the overall picture is still positive, despite the deterioration, and the most reliable indicators are only pointing to an orderly pullback in stocks. The Advance/Decline line remained strong in the face of the risk-off shift, even as decliners outnumbered advancing issues by a 3-to-2 ratio on the NYSE, and by a 2-to-1 ratio on the Nasdaq. The average number of new 52-week highs declined again on both exchanges, dropping to 52 on the NYSE and 30 on the Nasdaq. The number of new lows also rose in the meantime, jumping to 19 on the NYSE and 72 on the Nasdaq. The percentage of stocks above the 200-day moving average took a nosedive due the weakness in small-caps, and the indicator is now far away from its recent one-year high, as it closed the week near 54%.

Shorts

Short interest was virtually unchanged for the second week in a row, and despite the negative shift in investor sentiment, the total amount of bearish bets remains close to ts cycle lows. Revlon (REV) defied the pullback in the major indices, scoring its fifth positive week in a row, and the stock has a short interest of 54, so the stocks still has upside potential. Our previous pick, Sempra Energy (SRE) hit yet another new all-time high this week, riding the bullish utilities wave, and since the stocks days-to-cover (DTC) ratio is still very high, showing a reading of 15 the rally could continue in the coming week. Microchip Technology (MCHP) also has a very high DTC ratio of 15, and while the stock's market has been very quiet this week, it remains within striking distance of its all-time high.

ISM data

We will have another busy week of economic releases, and besides the all-important government jobs report, the ISM manufacturing and non-manufacturing PMIs will be in focus. The week will kick off with the Chicago PMI on Monday, the ISM measures will be out on Tuesday and Thursday respectively, the ADP payrolls number is scheduled for Wednesday, while the government jobs report will come out on Friday. In light of Friday's developments, trade-related headlines could be all the rage again, and bulls are hoping that we won't witness yet another period of escalation between the two sides. Stay tuned!