State of the Stock Market Analysis for the Week Ending on October 21st, 2018 (Red-Bar-Green-Bar-Madness 10-21-18)


All You Need Is Jobs

Volatility reigned supreme on Wall Street for the second week in a row, as stocks entered what traders often refer to as “red-bar-green-bar-madness“ due to the sharp reversals on a daily basis. It was a tumultuous week for investors regarding economic releases too, with lots of positive and negative developments to digest. Treasuries remained in focus following the swift rise in yields after the Fed meeting, and the trends in the bond market that caused turmoil in equities continued last week as well. Besides the increasing yields, European and Chinese troubles were mostly behind the volatility. However, despite the new bear market lows in China and the escalating tension within the European Union, the underlying trend is still positive on Wall Street, as domestic stocks are still the strongest.


The string of better-than-expected quarterly earnings reports and modest economic numbers supported equities throughout the week, although there were negative surprises too. Retail sales disappointed across the board and the housing market continued to show weakness, with building permits, housing starts, and existing home sales all missing expectations. On the other hand, job openings surged higher while new jobless claims are still near their record lows, as the labor market is still rock solid. Industrial production also beat the consensus estimates, and the more forward-looking Philly Fed and Empire State indices confirmed the rapid expansion in the manufacturing sector. So, while the hawkish minutes triggered a wave of selling in stocks, the tightening plans of the Fed are still in-line with the strength of the economy.


The technical picture remains mixed with regard to the major indices, since the short-term trend remained bearish despite the strong early-week bounce. However, the rising long-term trend is still in no danger at this point. The major indices remained below their now declining 50-day moving averages, with the relatively weak Nasdaq being the furthest from its short-term indicator. The tech benchmark also closed below its rising 200-day moving average, while the Dow and the S&P 500 are still above their long-term measures. The Russell 2000 is still below both of its moving averages, as small-caps continue to lag the broader market. On a positive note, the Volatility Index (VIX) closed near 19.5, lower than one week ago, and it is below the “line-in-the-sand” 20 level, even after two nervous weeks of trading.


Market internals finally improved somewhat after a month of deterioration, and although the most reliable measures are only showing slight positive divergences, bulls are glad to see that the negative trend is over. The Advance/Decline ratio was higher despite the flat week in equities, as advancing issues outnumbered declining stocks by a 2-to-1 ratio on the NYSE, and a 3-to-2 ratio on the Nasdaq. The average number of new 52-week highs continued to decline on both exchanges, dropping to 15 on the NYSE and 17 on the Nasdaq. The number of new lows halved in the meantime, falling to 395 on the NYSE and 140 on the Nasdaq. The percentage of stocks above their 200-day moving average rose slightly despite the weakness in small-caps, although the closing level of 29% is still very low.


The global risk-off shift is hurting the most-shorted issues on Wall Street as well, but there are still stocks that are performing well amid the rise in short interest. Home furnishing store, RH (RH), is up so far this month after a stormy September, and with its short interest at 38%, shorts could fuel a strong year-end rally. Office-focused Digital Realty (DLR), a REIT, defied the trend in its sector and staged a rally last week, and since the stock sports a days-to-cover (DTC) ratio of 12, the recovery could continue in the coming weeks. Current GorillaPick, Hormel Foods (HRL), confirmed its recent relative strength, hitting a one-month high in the nervous environment, and its DTC ratio of 14 could mean that a short squeeze may be ahead.


We have a huge week ahead regarding corporate earnings, with some of the most valuable companies reporting their quarterly numbers. Microsoft (MSFT), Amazon (AMZN), and Google parent Alphabet (GOOG) represent more than $2 trillion in market cap alone, and the likes of Visa (V), AT&T (T), Boeing (BA), and Verizon (VZ) also have the potential to move markets. The economic calendar is less busy, and only the durable goods report on Thursday and the advance GDP print on Friday are expected to make major waves. That said, Treasury yields are still near their multi-year highs, so investors should keep an eye on bonds as well as the troubled overseas markets. Should the bullish trend in earnings continue, buyers could be back in control. Stay tuned!


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