State of the Stock Market Analysis for the Week Ending on September 23rd, 2018 The Stock Market Recovers From Last Week 9-23-18)

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Judging by the headlines concerning the escalating U.S.-China trade war, the “Treasury-massacre,” and the Syrian War, it should have been a disastrous week for stocks. But on the contrary, the Dow and S&P 500 surged to new all-time highs. The Dow Jones Industrial Average did so for the first time since January, and despite the mixed performance of the major indices, equities had another encouraging week. The weakness in the market-leading tech giants weighed on the Nasdaq, as it closed the week slightly in the red, together with the Russell 2000. Since the tech benchmark has been leading the bull market for years, traders think that a short breather is healthy, but the small-cap weakness is something to monitor in the coming weeks.


Economic numbers were few and far between last week, and although there were both positive and negative surprises, investors’ reactions were clearly bullish. Treasury yields surged higher across the curve, hitting multi-year highs, with investors still believing in the economic boom. The housing market, which has been struggling in recent months due to rising interest rates, showed some encouraging signs, with the NAHB Housing Index and housing starts both beating expectations, even though building permits and existing home sales disappointed again. The Philly Fed Index rebounded after a weaker month, as manufacturing continues to impress, despite the trade-related fears, which propelled the Dow and the whole industrial sector higher.


The technical picture reflects the divergence of the recent weeks, with the Nasdaq still being the closest to its rising 50-day moving average, while the Dow and the S&P 500 are well above their short-term indicators. The long-term trend is not in question on Wall Street, since all three benchmarks are far from their rising 200-day moving averages. The Russell 2000 touched its short-term moving average last week, but despite its relative weakness, the small-cap index bounced from this key average, while steering clear of its rising 200-day moving average. The Volatility Index (VIX) hit its lowest level since early August on Friday, closing the week near 11.5. And although the index usually ticks higher before the Fed’s rate decisions, the current level seems very promising for bulls.


Market internals are still not confirming the new highs in the major indices, with several reliable measures showing negative divergences as a result of the weakness in small-caps and the tech sector. The Advance/Decline line edged higher again last week, but it still didn’t hit its record high, even as advancing issues outnumbered declining stocks by a 5-to-1 ratio on the NYSE, and by a 3-to-1 ratio on the Nasdaq. The number of new 52-week highs declined surprisingly on both exchanges, falling to 86 on the NYSE and 83 on the Nasdaq. The number of new lows edged lower too, falling to 96 on the NYSE and 78 on the Nasdaq. On a positive note, the percentage of stocks above their 200-day moving averages rose for the second week in a row, closing near 53% on Friday.


The most-shorted issues benefited from the improving investor sentiment again, outperforming the broader market last week, as the new all-time highs in the major indices spooked shorts. Camping World (CWH) might be forming an important bottom following nearly a year of steep losses, and after last week’s rally, shorts could be starting to feel the heat, given the stock’s short interest of 34%. Ubiquiti Networks (UBNT) also has a short interest of 31%, and since the stock broke out to new highs this month, a major bull run could be ahead. The short squeeze continued for another week in Snap-on (SNA), with another new all-time high in the stock as well, and with its days-to-cover (DTC) ratio still at 12, bears will likely have a hard time exiting their positions.


It will be a very busy week regarding economic releases following last week’s relatively calm action, and although the Fed’s rate decision will be the most important event on Wednesday, the week won’t end there. The durable goods report and the final GDP print will come out on Thursday. Additionally, the PCE Price Index, personal spending number, and the Chicago PMI are scheduled for Friday, while the CB Consumer Confidence will be released before the Fed on Tuesday. The third rate hike of the year seems to be all but guaranteed thanks to the uptick in inflation, and robust economic growth. However, the Central Bank’s guidance could provide surprises, and especially following the recent surge in Treasury yields. A cautious Fed could cause turmoil across asset classes. Stay tuned for a crucial week!


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