The week started on a gloomy note, as the whole world was awaiting Iran’s answer to the airstrike that killed one of the country’s most influential leaders, General Qasem Soleimani. While the Persian state did launch ballistic missiles against Iraqi bases that are housing U.S. troops, the fears of an imminent widespread conflict in the Middle East proved to be overly pessimistic. The major indices quickly recovered from the pullback, and thanks to the encouraging global economic numbers and the continued trade-related optimism, the benchmarks hit new all-time highs yet again. The tech sector spearheaded the recovery, and while safe-haven assets experienced a brief but explosive rally at the beginning of the week, bulls clearly got back in the driving seat later on.
The key economic releases were upbeat both in the U.S. and overseas, with especially the ISM non-manufacturing PMI making bulls smile on Tuesday. While the manufacturing measure hit a more than ten-year low in December, the services sector, which dominates the domestic economy continues to shine, and the PMI’s 55 reading makes a recession highly unlikely in 2020. That is especially true considering the improving conditions in Europe, and even though the weakness in China is worrisome, the “phase one” trade deal and the recent monetary stimulus could lead to a rebound in the country. The non-farm payrolls number and hourly earnings missed expectations, but the labor market continued strong and the unemployment rate stood at 3.5% in December, near its multi-decade low.
The technical picture remains bullish across the board on Wall Street, despite the recent volatile pullbacks and the geopolitical tensions, as all of the key trend indicators continue to confirm the bull market. The S&P 500, the Nasdaq, and the Dow are well above their rising 200-day moving averages, and the benchmarks also remain above their steeply rising 50-day moving averages. Small-caps failed to follow the large-cap benchmarks higher this week, and while the Russell 2000 is still above its short- and long-term moving averages, it remains stuck below its 15-month high from December. The Volatility Index (VIX) topped 16 and hit its highest level since mid-December on Monday, but thanks to the swift recovery, the “fear gauge” closed the week lower, near the 12.5 level.
Although small-caps remained relatively weak this week, market internals continue to be bullish, and the most reliable breadth indicators are not pointing to an imminent correction, despite the relentless rally. The Advance/Decline line hit new bull market highs once again, 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, rising to 102 on the NYSE and 104 on the Nasdaq. The number of new lows was little changed, climbing to 11 on the NYSE and falling to15 on the Nasdaq. The percentage of stocks above their 200-day moving average briefly topped 70% this week for the first time in two years, and although the measure closed the weak near 69% again, participation in the rally remains healthy.
Short interest decreased even more despite the escalating geopolitical tensions, as the subsiding trade-related worries and the improving economic outlook led to a decrease in hedging activity among equities. Although Planet Fitness (PLNT) experienced quite a correction last year, it got within striking distance of its all-time high this week, and since its short interest is over 70%, a breakout could cause panic among shorts. That dynamic was clearly present in the market of Tesla’s (TSLA) shares as well, and while the stock’s short interest is “only” standing at 19%, the sheer size of the bearish bets all but guarantee further fireworks in the coming weeks. Microchip Technology (MCHP) hit another new all-time high this week, and the stock’s days-to-cover (DTC) ratio of 15 could mean that a short squeeze is ahead.
Given the uncertainty with regards to the next steps in the U.S.-Iran standoff, the price of crude oil and gold will likely remain in focus, and the materials sectors cold see more volatile days. As for the economy, we will have key reports coming out every day besides Monday, and we will get data from all of the key sectors. The Consumer Price Index and the Producer Price Index (PPI) will be out on Tuesday and Wednesday, respectively. The Philly Fed Index will highlight Thursday’s session, and the week will end on a busy note, thanks to industrial production, building permits, housing starts, and the Michigan consumer sentiment number. Treasury yields could also play a key role, and should the global economic rebound gain momentum, investors might start to worry about the possibilty of rate hikes by the Fed, especially since the U.S. and China are scheduled to sign the “phase one” trade deal next week. Stay tuned!
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