Commenting on today’s trading with a focus on key economic releases Gorilla Trades strategist Ken Berman said:
While the while stocks gave back their early gains on Friday was worrying, overall the week was a confidence boost for bulls. Stocks closed the week near their weekly highs on Friday, thanks to the positive trade developments, and since the week ended with another ‘boring’ session, it seems that bulls are finally back in control on Wall Street.
Even as key economic releases, bulls boost stocks
The major indices closed virtually unchanged on Friday despite a scary intraday sell-off and the benchmarks finished the last week of August in the green. The Dow gained 41 or 0.2%, to 26,403, the Nasdaq was down 11, or 0.1%, to 7,962 while the S&P 500 rose by 2, or 0.1%, to 2,926. Advancing issues outnumbered decliners by a 3-to-2 ratio on the NYSE, where volume was slightly below average.
While the first half of the week remained volatile on Wall Street, and a lot of key sectors were still under selling pressure, investor sentiment improved significantly towards the end of the week. The major indices bounced back, and the benchmarks all but recovered from the steep sell-off of the first week of the month. China decided against retaliating in the wake of last week’s scary escalation in the trade war, and the prospect of another round of high-level negotiations in September boosted risk assets across the board. With September being the worst month of the year for stocks according to seasonality studies, the fact that equities will start the month on a positive note is great news following months of wild swings.
The key economic releases of the week were mixed, and it’s clear that the U.S. consumer economy is the engine of growth even from a global perspective. The weekly number of new jobless claims remains very low, the CB consumer confidence number beat expectations by a wide margin yet again, while the preliminary GDP report confirmed that consumer spending has been growing at its fastest pace since 2014. The manufacturing sector continues to be weaker, but although core durable goods orders unexpectedly declined in July, headline orders beat the consensus estimate and the Richmond Manufacturing Index bounced back as well, so the sector might already be recovering.
Technicals
The technical picture continues to be mixed despite the bullish end to the week, and although the Dow and the S&P 500 got close to a short-term trend change, the Nasdaq is still negative on that time-frame. The S&P 500, the Nasdaq, and the Dow are still well above their flat 200-day moving averages, but the benchmarks are all stuck below their flat 50-day moving averages. Small-caps had a highly volatile, but ultimately bullish week, even though the Russell 2000 hit a seven-month low on Monday, but the index is still below both its 50- and 200-day moving averages. The Volatility Index (VIX) spent most of the week near the widely-watched 20 level, and even after the late-week rally, it finished Friday’s session near 19.
Market internals improved significantly thanks to the late-week rally in small-caps, and several of the most reliable measures are now pointing to another leg higher in the longest bull market in history. The Advance/Decline line hit a new bull market high this week, as advancing issues outnumbered decliners by a 3-to-1 ratio on the NYSE, and by a 4-to-1 ratio on the Nasdaq. The average number of new 52-week highs increased on both exchanges, climbing to 52 on the NYSE and 27 on the Nasdaq. The number of new lows dropped significantly in the meantime, falling to 107 on the NYSE and 106 on the Nasdaq. The percentage of stocks above the 200-day moving average ticked higher as well, but Friday’s closing value of 48% is still worryingly low compared to the price action in the major indices.
Shorts
Short interest declined somewhat towards the end of the week as volatility decreased and bulls took control of the market, and despite the recent hectic months, the total amount of bearish bets remains historically low. Accelerate Diagnostics (AXDX) has been drifitng higher ever since releasing its earnings, and this week, the stock hit a one-month high, and as it has a short interest of 49%, the rally might only be starting. Hormel Foods (HRL) recently hit a four-month high after breaking out from a consolidation pattern, and since the stock has a very high days-to-cover (DTC) ratio of 16, it might outperform the broader market in the coming weeks. Our previous pick Sempra Energy (SRE) hit another all-time high this week, fueled by the rally in utilities, and the stock could remain among the leaders, as it also sports a DTC ratio of 16.
Preview of next week
While we are in for a holiday-shortened week, things could get heated after Labor Day on Wall Street, as several key economic releases will be released on the historically active week. September usually kicks off with a surge in trading volumes due to the end of the holiday period, and with the looming Fed meeting in mind, economic numbers could trigger wild swings in stocks and bonds alike. The ISM manufacturing PMI will be out on Tuesday together with construction spending, the trade balance will highlight Wednesday’s session, while on Thursday, the ADP payrolls number and the ISM non-manufacturing PMI will likely make waves. The busy week will end with the crucial government jobs reports, but barring a huge negative surprise, stocks could enjoy tailwinds throughout the week, unless the trade war saga takes another negative turn. Stay tuned!
