State of the Stock Market Analysis for the Week Ending on November 18th, 2018 (Another Bust Week for Stocks 11-18-18)

All You Need Is Jobs

Stocks had another busy week. Although the most important events of the month, the midterms and the Fed meeting were already behind us, the Brexit saga, the confusion regarding the trade tariffs, and some key economic releases provided more than enough catalysts throughout the week. The major indices each closed the week in the red, but following the sharp decline at the beginning of the week, bulls were happy to see the nice bounce before the weekend. The energy sector was also at the center of attention since the price of oil fell the most it had in 3 years on Tuesday, extending the losses it suffered in the last couple of months. In spite of the 30% decline in the price of the commodity and the market-wide correction, oil-related companies still held their ground well, which is a positive sign for the overall stock market.


While overseas markets and the “trade wars” were in focus all week long, the few key economic releases continued to confirm the boom in the consumer economy, although there were signs pointing to a slowdown in manufacturing. The retail sales report provided a nice positive surprise for bulls, with both the headline and the core measures beating the already high consensus estimates. The Consumer Price Index (CPI) was in line with expectations, and that helped ease inflationary fears, following the stronger-than-expected Producer Price Index (PPI). Treasury yields dropped significantly thanks to that and Fed Chair Jerome Powell’s dovish words, which contributed to the broad rally in the second half of the week, despite the miss in industrial production and the Philly Fed Index.


The technical picture deteriorated somewhat last week, and the divergence between the major indices remained strong, with the weakness in the tech sector still being apparent. The Nasdaq, the Dow, and the S&P 500 are each below their declining 50-day moving averages, but the relatively strong Dow is above its 200-day moving average. While the S&P 500 got close to its 200-day moving average on Friday, it closed the week below its key indicator, together with the lagging Nasdaq. Small-caps started to show signs of strength last week, but the Russell 2000 is still well below both its declining 50-day and 200-day moving averages, being much weaker than the large-cap benchmarks. The Volatility Index (VIX) closed near the 18 level on Friday, following an early-week surge above 22, as the measure continues to show an encouraging positive divergence compared to the price action in stocks.


Market internals are a mixed bag, since even though some of the most reliable indicators remained stable in the volatile environment, a few measures got hit hard by the Fed-induced selloff. The Advance/Decline line remained well above its October low thanks to the relatively strong small-caps, as advancing issues outnumbered declining stocks by a 3-to-2 ratio on the NYSE and a 4-to-3 ratio on the Nasdaq. The average number of new 52-week highs declined after two positive weeks on both exchanges, falling to 33 on the NYSE and 24 on the Nasdaq. The number of new lows surged higher in the meantime, jumping to 173 on the NYSE and 178 on the Nasdaq. The percentage of stocks above their 200-day moving average fell below the 25% threshold again, and although the measure closed the week slightly above that level, it remains worryingly low following the steep correction.


While the post-election short squeeze was quickly halted by the Fed, short interest remained below the levels seen in October, even before the late-week rally that burned shorts yet again. Akcea Therapeutics (AKCA) had another blowout week, following a period of consolidation, and given its short interest of 49%, the stock’s relative strength could lead to a major move before the end of the year. Although Ubiquiti Networks (UBNT) has been trading sideways for months, the stock hit new all-time highs in the last couple of weeks, and since its short interest is still at 38%, bears are likely in for a rough ride. Iron Mountain (IRM) continues to sport a very high days-to-cover (DTC) ratio of 15, following the almost 10% rally of last week, and should the broader market take off as well, a short squeeze might be ahead in the stock.


The struggling housing market will be in focus in this holiday-shortened week, with housing-related indicators coming out on every day before Thanksgiving. The NAHB Housing Market Index will be out on Monday, building permits and housing starts are scheduled for Tuesday, while existing home sales will be released on Wednesday, together with the durable goods report, and the CB Leading Index. Homebuilders have been hit hard in recent months, and after months of declining activity and negative surprises, analysts expect a slight uptick in most of the measures, even though mortgage rates hit multi-year highs last week. The holiday season will officially kick off on Black Friday, and given the string of positive reports concerning the consumer economy, the coming month could be a real boost to stocks, as the major indices could be once again head toward new all-time highs. Stay tuned!


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