State of the Stock Market Analysis for the Week Ending on January 20th, 2019 (Bears and Bulls 01-20-19)
So far, 2019 hasn’t been kind to bears, as after three weeks of trading, we still have only had two negative days on Wall Street, and this week, the major indices closed higher in four out of five sessions. While bulls still have some work to do before we reach the all-time highs registered in October, the trend has definitely been encouraging ever since the panic lows of Christmas Eve. The U.S.-Chinese trade talks provided the most important positive catalyst of the week, and the progress could mean that a final deal could be signed before the end of the ‘truce’ in March. The largest financial firms kicked off earnings season this week, and their numbers have been mixed, even in light of their recent profit warnings. That said, investors’ reactions have been positive, and stocks could get an additional boost from the key reports in the coming weeks as well.
Several important economic releases have been delayed due to the partial government shutdown, but we still had a few pleasant surprises, with the industrial sector showing especially positive signs. While the Producer Price Index (PPI) was weaker-than-expected, similar to the Empire State Index, the more important Philly Fed Index, and industrial production numbers, came in above the consensus estimates in the face of the hostile global trends in the sector. The preliminary release of the Michigan Consumer Sentiment number was the weakest key indicator, and since the retail sales report has been delayed, we will have to wait until the end of the shutdown to take a closer look at the health of the consumer economy.
The technical picture improved significantly thanks to the persistent buying pressure on Wall Street, and the major indices are finally all above their flattening 50-day moving averages for the first time since the start of the correction in October. That said, the Nasdaq, the S&P 500, and the Dow are still well below their flattening 200-day moving averages, and their short-term indicators are also below their long-term ones. While small-caps have been relatively weak for months, due to the more than 15% gain in the Russell 2000 of late, the index is now also above its declining 50-day moving average, despite being far away from its 200-day moving average. The Volatility Index (VIX) hit its lowest level since the first days of December, as it closed the week below the 18 level, confirming the improvement in investor sentiment.
While market internals have also continued to heal, the effects of the long and deep correction are still apparent, and we still need to see further improvements in the most reliable measures. The Advance/Decline line continued its surge throughout the week, 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 ticked higher on both exchanges, climbing to 19 on the NYSE and 31 on the Nasdaq. The number of new lows also increased, rising to 13 on the NYSE and 18 on the Nasdaq. The percentage of stocks above their 200-day moving average continued to increase, finally hitting 25%, but the indicator remains worryingly low, despite the improvement.
One of the strongest short squeezes in history continued in earnest, thanks to the positive news flow and the improving sentiment, and short interest remains very low from a historical perspective on Wall Street. Home furnishing company RH (RH) surged higher in the second half of the week, following a period of consolidation, and since it sports a short interest of 38%, it could soon challenge its all-time high from last year. Iron Mountain (IRM) continued to rally together with the broader market, and even though its days-to-cover (DTC) ratio increased to 14, bears could be in for more pain. CH Robinson (CHRW) also has a DTC ratio of 10, and the stock broke out of a narrow trading range on Friday, possibly starting a major short covering rally.
The stock market will be closed in observance of Martin Luther King, Jr. Day on Monday, and the economic calendar will be virtually empty as well throughout the week, so technical factors and earnings will likely determine price action in stocks. The Richmond Manufacturing Index is the only key indicator of the week, which is scheduled to come out on Wednesday, but should the government shutdown finally end, the schedule could change significantly. As for earnings, the reports from Johnson & Johnson (JNJ), Procter & Gamble (PG), IBM (IBM), and Intel (INTC) will be closely watched, with Thursday being the busiest day of the week. Since the Brexit process will likely be delayed, we might be in for a relatively quiet period after the previous hectic months, even though the major indices may be due for a breather following the strong rally of the past three weeks. Stay tuned!
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