With Economic Data Mixed, Why Are Stocks So Strong?



The daily NYSE All A/D Line formed a bullish divergence on August 15, when the Dow dropped over 800 points. It completed its bottom formation on August 29, when it moved through its resistance (see arrow) and it made a new high before the long weekend.

The NYSE Stocks Only A/D Line also overcame its resistance at the same time. It had been lagging behind the All Stocks A/D Line and did not make a new high until Friday. On both A/D lines, the pullback Tuesday is clearly visible but did not change the bullish setup.

The slightly weaker than expected jobs report on Friday, together with the recent comments from Fed Chairman Powell, make a 0.25% rate cut likely at the end of the month. I would not count on a 0.50% cut, as the economic data in my opinion does not currently justify such a cut. For example, last Thursday’s ISM Non-Manufacturing Index came in at 56.4 much better than the consensus estimate of 54. Clearly, the economic data is mixed, and isn't clearly forecasting an economic downturn, and so Fed action will likely be limited.

This week, we get the PPI and CPI inflation reports, as well as Retail Sales and Consumer Sentiment on Friday. The end of August reading on sentiment was weaker than expected, so this mid-month reading will be interesting to see.



Yields rose this week, which was not surprising after the sharp decline the prior week. There are no signs of a bottom based on the weekly chart of 10-Year T-Note Yields. The MACD-Histogram clearly indicated lower yields at the end of November 2018 (points a). It would take a number of weeks before this indicator could turn positive, as yields are still well below the sharply declining 20-week EMA. Before a bottom is possible, the EMA should start to flatten out.

The precious metals corrected at the end of the week, which was consistent with my comments last week that GLD “exceeded the monthly starc+ bands for each of the past three months, which makes some consolidation or a pullback more likely”.

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