Decliners Outnumbered Advancing Issues; Short Interest Ticked Higher

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Commenting on today’s trading Gorilla Trades strategist Ken Berman said:

The major indices broke their three-day winning streak on Friday, due to President Trump’s downbeat words regarding the trade talks with China, but the losses were limited thanks to a strong intraday bounce. The Dow lost 91 or 0.3%, to 26,287, the Nasdaq was down 80, or 1%, to 7,959 while the S&P 500 lost 19, or 0.7%, to 2,919. Decliners outnumbered advancing issues by a more than 2-to1 ratio on the NYSE, where volume was slightly above average.

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Friday’s session broke the momentum of the recovery.  The intraday rally was encouraging, and the negative headlines seem to have only temporary impact on stocks. It might be surprising to some, but seasoned investors could spot a lot of positive signs this week, despite the volatility and the global turmoil, and on Friday, bulls once again proved that they are ready to buy every dip, no matter how scary the headlines are.

Although  the summer months are less active on Wall Street, this year, August might turn out to be one of the most volatile months of the year. The escalating trade tensions between the U.S. and China were behind the turmoil across asset classes, and this week has been all about the Chinese yuan. The currency broke the psychologically important 7 level against the dollar, and the fact that the People's Bank of China (PBOC) let that happen triggered a massive risk-off shift on Monday. While stocks recovered well after their worst session of the year, bulls are still not out of the woods and we could be in for more volatile days in the coming weeks.

Economic releases took a backseat this week, since all eyes were on the trade-related developments, but the few key reports that came out all provided major surprises. The ISM non-manufacturing PMI came in well below the consensus estimate, and that raises the odds of a broader slowdown in the domestic economy. The services sector has been holding up well in the face of the bearish global pressures and the troubles in manufacturing, and even as the labor market continues to show healthy growth, the weak PMI could be a hint on more problems ahead. The much worse-than-expected core Producer Price Index (PPI) also confirms the slowdown, and Treasury yields, which were already under severe pressure due to the trade worries, hit new multi-year lows this week, as rate cut odds surged.

The technical picture is mixed in the wake of the volatile swings, but even though the short-term trend turned negative on Wall Street, the bull market is still well and alive, and the long-term trend indicators are all pointing higher. The S&P 500, the Nasdaq, and the Dow are still well above their rising 200-day moving averages, but the indices finished slightly below their rising 50-day moving averages despite the late-week rally. Small-caps continue to be worryingly weak, and due to Friday’s dip, the Russell 2000 closed the week below its 50- and 200-day moving averages. The Volatility Index (VIX) spiked as high as 25 on Monday, its highest level since late-December, but thanks to the improving investor sentiment, the fear gauge dropped below 20 and closed near 18 on Friday.

Market internals remained weak all week long, despite the healthy bounce, as the continued weakness in small-caps affected the most reliable breadth measures in a negative way. The Advance/Decline line remained well below its recent bull market high, as decliners outnumbered advancing issues, by a 2-to-1 ratio on the NYSE, and by a 4-to-3 ratio on the Nasdaq. The average number of new 52-week highs declined again on both exchanges, falling to 45 on the NYSE and 53 on the Nasdaq. The number of new lows exploded higher in the meantime, jumping to 169 on the NYSE and 191 on the Nasdaq. The percentage of stocks above the 200-day moving average took another hit on Monday, and although the indicator recovered together with the broader indices, later on, it still closed the week below 50%.

Short interest ticked higher for the second week in a row, a lot of investors hedged themselves against the increasing trade-related uncertainty and effects of the global economic slowdown. Following two months of consolidation, Gogo Inc. (GOGO) jumped higher thanks to its better-than-expected earnings report, and with its short interest at 63% the stock could be ready for a sustained rally. Our previous pick, MiMedx Group (MDXG) continues to show relative strength, and with its short interest also being above 60%, even a short squeeze is in the cards. Sempra Energy (SRE) defied the turmoil and closed the week in the green, and since the stock has a very high days-to-cover (DTC) ratio of 15, it could be ready to resume its historic rally.

Next week will be busy in terms of economic releases, but the trade war will likely steal the show again, especially if the Chinese yuan remains under pressure. That said, the Tuesday’s Consumer Price Index could prove to be crucial for investors in light of this week’s huge PPI miss. The retail sales report, the Philly Fed Index, industrial production, and the Empire State Manufacturing Index will all be released on Thursday, while on Friday, we will have housing starts, building permits, and the Michigan consumer sentiment number coming out. While short-term technical turned bearish this week, the major domestic indices clearly outperformed their international peers, and should sentiment improve further, that strength could be the basis of another leg higher in the bull market. Stay tuned!

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