State of the Stock Market Analysis for the Week Ending on September 9th, 2018 September Kicked Off on a Lower Note 9-9-18)
September kicked off on a lower note on Wall Street, even as the major indices diverged substantially for the most part of the holiday-shortened week. The Nasdaq finished with steep losses, giving back the gains of the previous two weeks, the S&P 500 held up much better, while the Dow drifted sideways all week. The looming emerging market crisis, regulatory woes in the tech sector, and President Trump’s in-party troubles made headlines during the week. And while the main overseas benchmarks look wounded, domestic stocks are still near record levels. Treasury yields and inflation are also back at the center of attention since the short-end of the yield curve is pushing aggressively higher again, likely causing sleepless nights for Jerome Powell and Co.
The economic calendar was stacked over the past week even before the government jobs report on Friday, with important releases coming out every day after the Monday break. The ISM manufacturing and non-manufacturing PMIs both beat expectations, with the former hitting its highest level since 2011 at 61.3, but construction spending and factory orders painted a bleaker picture regarding the outlook for manufacturing. On a positive note, weekly jobless claims fell to a 49-year low, coming in at 203,000. The unemployment rate was unchanged at 3.9%, non-farm payrolls rose by 201,000, slightly beating the consensus estimate, but the robust 2.9% wage growth was the real game changer in the jobs report, reinforcing inflationary fears before the next Fed meeting.
The technical picture is still positive, even though the correction took its toll on the Nasdaq, as the tech benchmark got close to its rising 50-day moving average by the end of the week. The Dow and the S&P 500 are still well above their rising short-term moving averages, and all three benchmarks are far away from their bullish 200-day moving averages, with the long-term rising trends not being in danger as of right now. The Russell 2000 was among the stronger benchmarks, as small-caps held up well amid the tech weakness, which is a positive signal for the coming weeks. The Volatility Index (VIX) crept higher throughout the week, closing at its highest level since early July near 15.5, but staying well below its intraday high in August, as the correction remains contained at this point.
Market internals clearly deteriorated last week, in-line with the price action in equities, with the broad decline hurting all of the most reliable measures. The Advance/Decline line fell to a three-week low as the indices drifted lower, and declining issues outnumbered advancing stocks 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 on both exchanges, falling to 98 on the NYSE, and 125 on the Nasdaq. The number of new lows more than doubled in the meantime, jumping to 97 on the NYSE, and 77 on the Nasdaq. The percentage of stocks above their 200-day moving average also declined sharply, getting close to 50% again, despite the relative strength of small-caps.
The most-shorted issues declined together with the major indices, but they are still among the best-performing stocks from a longer-term perspective, since short interest remains at historically low levels. Duluth Holdings (DLTH) had another eventful week, surging by almost 30% to a 19-month high before a sharp pullback, and its short interest of 46% could mean that there is still more left in the tank. Current GorillaPick Hormel Foods (HRL) completed the breakout that traders expected after the stock’s recent quick recovery, and the more than 5% rally could be the start of a real short squeeze, with its days-to-cover (DTC) ratio still at 16. McCormick & Co. (MKC) also sports a high DTC ratio of 12, and since the stock moved to a new all-time high last week, shorts could be in some trouble in the coming weeks.
The second half of this week will once again be hectic regarding economic releases, and inflation will clearly be what investors focus on following last week’s jobs report. The PPI and CPI indices will be released on Wednesday and Thursday respectively, and Treasuries especially could be in for a wild ride with the Fed’s next rate decision being only two weeks away. Friday we will have the retail sales report, industrial production, and the preliminary Chicago sentiment number, and bulls hope that the consumer sector will remain a positive for the economy. Trading activity has already been on the rise last week on Wall Street, and given the busy economic calendar, the trade war, the boiling emerging market segment, and the political tensions surrounding the President, volatile trading seems likely to continue this week. Stay tuned!
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