State of the Stock Market Analysis for the Week Ending on November 25th, 2018 (A Decisively Bearish Holiday-Shortened Week For Stocks 11-25-18)

All You Need Is Jobs

Stocks had a decisively bearish holiday-shortened week on Wall Street, with the major indices all finishing deep in the red, despite the noticeable “under-the-hood” strength. The Nasdaq was the weakest of the benchmarks, and due to the sharp drop in the likes of Apple (AAPL) and Facebook (FB), the tech index fell to its lowest level since April. The Dow and the S&P 500 stayed above their lows from October, and on a positive note, the main small-cap index, the Russell 2000, was also relatively strong last week. International headwinds remained strong, with Asian and European assets remaining under pressure in the unsettling environment.

Economic numbers were mixed ahead of the all-important holiday season, but despite the few negative surprises, growth remains solid in most of the key sectors. The housing market, which saw a distinct downturn this year, finally showed signs of stability, with existing home sales, housing starts, and building permits all ticking higher and beating consensus estimates in October. The durable goods report provided the strongest negative catalyst since both the headline and the core measure missed expectations, and the previous readings were also revised downward. New jobless claims also increased unexpectedly last week, but the forward-looking measure is still very weak from a historical standpoint.

The technical picture deteriorated again due to the broad selloff, and the short-term trend continues to be negative on Wall Street, with the major indices now being in the red for both the month and the year. Despite the recent strong bounce, the Nasdaq, the S&P 500, and the relatively strong Dow are now all well below their declining 50-day moving averages. The benchmarks are also below their 200-day moving averages, and in the case of the S&P 500 and the Nasdaq, its short-term indicator is close to dipping below its long-term one, completing the “death-cross” pattern. While the Russell 2000 already completed the infamous pattern, it started to show strength this week, despite being clearly below its moving averages. The Volatility Index (VIX) remains relatively low compared to the price action, even after drifting higher and closing the week above the key 20 level.

While market internals also showed weakness last week, some of the most reliable measures continue to stubbornly hold up in the face of the bearish price action, which is an encouraging sign ahead of the last month of the year. The Advance/Decline line remained above its October low, even as declining issues outnumbered advancing stocks by a 3-to-2 ratio on the NYSE, and by a 2-to-1 ratio on the Nasdaq. The average number of new 52-week highs continued to decline on both exchanges, falling to 25 on the NYSE and 16 on the Nasdaq. The number of new lows increased in the meantime, rising to 284 on the NYSE and 196 on the Nasdaq. The percentage of stocks above their 200-day moving average dipped lower again, falling below the 22% level on Black Friday, still being the most bearish among the key indicators.

Since a lot of institutions closed their trading books early last week, it’s no surprise that short interest was virtually unchanged, staying below the levels seen in October, thanks to the post-election short squeeze. Akcea Therapeutics (AKCA) continued to show strength in the bearish environment, edging slightly higher again, as its short interest even ticked higher to 50% in the meantime. While current GorillaPick, Hormel Foods (HRL), had a volatile week, the stock finished close to its all-time high, and given its very high days-to-cover (DTC) ratio of 13, another leg higher could be ahead. Realty Income Co. (O) drifted lower last week after hitting a 2-year high this month, but since the stock sports a DTC ratio of 11, it might target its all-time high in the coming weeks.

We could have another very busy week on Wall Street, especially in light of the recent volatility in stocks, since besides the crucial G20 meeting, several key economic numbers will also be released. The CB Consumer Confidence Index will be released on Tuesday, the preliminary GDP reading will highlight Wednesday’s session, while the core PCE Price Index and the minutes from the recent Fed meeting will be released on Thursday. Given the confusing post-midterm developments in the U.S.-Chinese trade relations, the G20 meeting could turn out to be a defining event for the coming months. An agreement between China and the U.S. could finally end the deep correction in stocks. Stay tuned!


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