State of the Stock Market Analysis for the Week Ending on October 28th, 2018 (Hitting Multi-Month Lows 10-28-18)
It was a week of wild swings on Wall Street, with earnings season, the debate between Italy and the European Union, and the very active Treasury market all providing plenty of moves in the market. The major indices all finished the week in the red, hitting multi-month lows in the process, and officially entered correction territory, dropping by 10% from their all-time highs. Price action was not in-line with fundamentals, since most of the earnings reports beat expectations, and economic numbers were mixed at worst. However, in this nervous environment, no news was good enough to turn the bearish tide. Also, the week ended on a negative note with regards to earnings, as Amazon (AMZN) and Google parent Alphabet (GOOG) both provided relatively weak guidance for next quarter.
The week was relatively light on key economic releases, with the most-awaited releases coming out on Thursday and Friday. Although the advance GDP print came in slightly below the blowout 4.2% reading from the previous quarter, at 3.5%, it still beat consensus estimates. The robust expansion didn’t push inflation higher, and at least the GDP price index declined to an annualized 1.7%, which is below the Fed’s target. The durable goods report was mixed, with the headline number coming in better-than-expected, while the core measure missed consensus estimates. The more forward-looking manufacturing and services PMIs were both higher-than-forecast, which bodes well for the last couple of months of the year for bulls.
The technical picture further deteriorated due to the volatile correction, and although the long-term trend is still advancing, the short-term indicators are bearish. The major indices are still well below their declining 50-day moving averages, and even the relatively strong Dow closed below its long-term moving average as well. The Nasdaq and the S&P 500 are also below their 200-day moving averages, which already turned lower in the case of the Dow and the S&P 500. The Russell 2000 showed encouraging strength on Friday, but after more than a month of relative weakness, small-caps are still in much worse shape than the broader market with regards to technicals. While the Volatility Index (VIX) closed the week above the 24 level, it continues to be below its high from early-October, which is a positive sign for the coming week.
Market internals remained in-line with the bearish price action, and although several measures show positive divergences, we could be in for more volatile trading in stocks. The Advance/Decline line hit its lowest level in 5 months, as declining issues outnumbered advancing stocks by a 3-to-1 ratio on the NYSE, and by a 2-to-1 ratio on the Nasdaq. The average number of new 52-week highs also declined further on both exchanges, dropping to 9 on the NYSE and 15 on the Nasdaq. The number of new lows increased significantly in the meantime, jumping to 420 on the NYSE and 430 on the Nasdaq. The percentage of stocks above their 200-day moving average remains very low despite the late-week strength in small caps, and Friday’s 22% level is a worrying sign for investors.
The most-shorted issues experienced several strong rallies in the volatile environment, and the ongoing earnings season has also caused increased activity among the most-hated stocks. Gogo Inc. (GOGO) continued to defy the headwinds, rising for the second week in a row, and given its short interest of 61%, the stock could really take off in the coming weeks. Revlon (REV) has a short interest of 37%, and despite the market-wide selloff, it managed to climb to its highest level in more than a year, confirming its relative strength. Extra Space Storage (EXR) sports a days-to-cover (DTC) ratio of 11, and since the stock has been drifting higher this month, despite the rout in housing-related issues, the stock could be in for a short squeeze soon.
We will have a very busy week regarding economic releases, with key indicators coming out from all the major sectors of the economy. The week will kick off with the core PCE price index, the Fed’s favorite inflation measure, while personal spending will also be out on Monday. CB consumer confidence is scheduled for Tuesday, the ISM manufacturing PMI will be released on Thursday, while the week will end with the government jobs report on Friday, as usual. Investors should keep a close eye on Treasuries again, and besides the possible large swings in yields, corporate earnings will also continue to come in throughout the week. So, with the campaign before the midterms entering its last week, traders are unlikely to be bored. However, bulls are hoping to finally see a durable rally in stocks. Stay tuned!
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