State of the Stock Market Analysis for the Week Ending on February 17th, 2019 (Things Are Alive and Well on Wall Street 02-17-19)

All You Need Is Jobs

The rally that started following the panic on Christmas Eve is well and alive on Wall Street, and despite the brief pullbacks, the major indices are getting closer to their pre-correction highs. It’s safe to say that this week, China was at the center of attention, since the local markets reopened following the New Year celebrations, and the next round of the trade talks took place in Beijing as well. Although a formal agreement still hasn’t been signed, the possible extension of the March 1st deadline made bulls smile. While last week, a second government shutdown seemed likely, lawmakers struck a deal on border security on Tuesday and, somewhat surprisingly, President Trump decided to sign the bill. That said, he declared a national emergency to secure additional funding for the Wall, which could lead to further political turmoil in Washington.


We had a hectic week with regard to economic releases since the reports that were delayed due to the government shutdown finally started to come out. The December retail sales report provided the biggest shocker, as sales collapsed by the most in more than a decade. White House advisor Larry Kudlow said that a “glitch” caused the decline, but the temporary effect of the turmoil in financial markets might also be behind the plunge. The headline Consumer Price Index (CPI) and Producer Price Index (PPI) also came in below expectations, but the more reliable core measures both pointed to healthy growth in the economy. The preliminary reading of the Michigan Consumer Sentiment number rebounded encouragingly in January, but on a negative note, industrial production came in well below expected for the first month of the year.


The technical picture improved further thanks to the bullish week, and the S&P 500 and the Dow successfully tackled their 200-day moving averages, proving the strength of the underlying trend. The slightly weaker Nasdaq finished the week right at its long-term moving average, but all three of the benchmarks are still clearly above their rising 50-day moving averages. Small caps had a blowout week, with the Russell 2000 being relatively strong for the second week in a row. The index hit its highest level in three months on Friday, while getting very close its 200-day moving average and leaving behind its short-term moving average. The Volatility Index (VIX) dropped below 15 for the first time since early October, and the continued declining trend in the VIX confirms the recovery in stocks.


The positive trend in market internals also remains intact, as the most reliable measures are now in line with a healthy bull market, even though there is still room for improvement. The Advance/Decline continued its surge higher, hitting a new bull market high on Friday, as advancing issues outnumbered declining stocks by a 5-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 87 on the NYSE and 58 on the Nasdaq. The number of new lows decreased in the meantime, edging lower to 8 on the NYSE and 16 on the Nasdaq. The percentage of stocks above their 200-day moving average jumped higher thanks to the broad-based rally, hitting 43% on Friday, which is the indicator’s highest level since the start of the year-end correction.


The historic short squeeze continued unabated on Wall Street, as the most-shorted issues out-performed the broader market again, pushing short interest back towards last year’s lows. While Revlon (REV) has been drifting sideways since November, after doubling in three months, the stock got close to its prior highs this week, and since it has a short interest of 41%, the rally could soon continue. Mattel (MAT) hit its highest level since July, after publishing its quarterly report, and since the stock still sports a days-to-cover (DTC) ratio of 12, it could add to the 40% gain of the past couple of weeks. Rollins (ROL) also has a DTC ratio of 10, and after hitting a two-month high this week, a short squeeze could propel the stock toward its all-time high from November.


There will be fewer key economic reports coming out during the holiday-shortened week, but we could still be in for some fireworks on Wednesday and Thursday. The minutes from the latest Fed meeting will be released on Wednesday, and given the huge shift in the Central Bank’s stance, every word will be under scrutiny. The delayed durable goods report and the Philly Fed Index will both be out on Thursday, together with the CB Leading Index, while on Friday we will get the Fed’s monetary policy report. The trade talks with China will also continue next week in Washington, and the extension of the talks could mean that a deal is already in the works. With the improving technicals in mind, an agreement might be just the catalyst to propel the major indices to new all-time highs in the coming weeks. Stay tuned!


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