State of the Stock Market Analysis for the Week Ending on October 26th, 2019 (Choppy Trading | State of the Stock Market 10-26-19)
Politics and corporate earnings had the most significant impact on financial markets this week, and while global risk assets continued to rally, U.S. stocks drifted sideways in choppy trading until Friday. The earnings picture was mixed compared to last week’s clearly bullish landscape, with especially Amazon’s and 3M’s (MMM) weak numbers causing concern regarding the state of the global economy. That said, there were plenty of positive surprises as well, with Microsoft (MSFT), Intel (INTC), Tesla (TSLA), Visa (V) and Procter & Gamble (PG) all posting encouraging results. Although the Brexit saga still has not reached its conclusion, the risk of a hard Brexit has diminished, which boosted investor sentiment globally, similar to the ceasefire in Syria.
We had a relatively quiet week in terms of economic releases, but the few key reports leaned bearish again. Despite the weak numbers, Treasury yields were virtually unchanged for the second week in a row, but the yield curve continues to predict a rate cut by the Fed next week. Both core and headline durable goods orders missed the consensus estimates, but the Markit manufacturing PMI and the Richmond Manufacturing Index both came in above forecast, giving hope to bulls that the soft patch in manufacturing will be short-lived. After several weeks of positive releases, the housing market sent negative signals this week, with the Housing Price Index, new home sales, and existing home sales all missing expectations.
The technical picture is still positive across the board, despite the two choppy and directionless weeks in a row, and the major indices remain in advancing short and long-term trends. The S&P 500, the Nasdaq, and the Dow are still well above their rising 200-day moving averages, and the benchmarks also closed above their now rising 50-day moving averages on Friday. Small-caps continue to support the bullish case, as the Russell 2000 hit a one-month high on Monday. The index could easily get closer to its all-time high in the coming weeks, being above both its moving averages. The Volatility Index (VIX) remains below the 15 level, closing the week near 12.5 ahead of the crucial Fed decision, which is another confirmation of the underlying bullish trend in stocks.
Market internals improved again thanks to small-caps, and while some of the most reliable measures are still weaker than before last year’s deep correction, the healing process continues. The Advance/Decline line hit new bull market highs this week as well, as advancing issues outnumbered decliners by a 4-to-1 ratio on the NYSE, and by a 3-to-1 ratio on the Nasdaq. The average number of new 52-week highs increased again on both exchanges, rising to 105 on the NYSE and 60 on the Nasdaq. The number of new lows ticked lower in the meantime, dropping to 24 on the NYSE and 50 on the Nasdaq. The percentage of stocks above their 200-day moving average continued to increase in the choppy environment, as the measure hit 58% on Friday.
Short interest continued to plunge at the beginning of the week, and although the decline slowed down, later on, the most-shorted issues still performed much better than the average thanks to positive sentiment. Revlon (REV) broke out from its bullish consolidation pattern this week, hitting a new eight-month high, and since the stock still has a short interest of 54%, bears could be in for more pain. Tanger Factory Outlet (SKT) popped up on the list of stocks with the highest short interest, with a reading of 49%, and after two wildly bullish weeks, the stock could continue its recovery. Snap-on (SNA) also hit a multi-month high this week, and since the stock has a very high days-to-cover (DTC) ratio of 16, it could be ready to reach its all-time high from last year in the coming months.
After this week’s relative lull, next week will be packed with crucial economic releases, not to mention the Federal Reserve’s expected rate cut. The CB consumer confidence number will be out on Tuesday, along with the ADP payrolls number, while the advance GDP print, and the Fed’s announcement will highlight Wednesday’s session. The Core PCE Price Index, the Chicago PMI, and personal spending will be out on Thursday, while the week will end with a bang, with the government jobs reports and the ISM manufacturing PMI both coming out on Friday. Earnings season will also be in full gear, and Apple (AAPL), Google parent Alphabet (GOOGL), Facebook (FB), Exxon (XOM), and Mastercard (MA) could all have a huge impact on stocks, so investors should fasten their seatbelts. Stay tuned!
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