State of the Stock Market Analysis for the Week Ending on January 13th, 2019 (Stocks Break 5-Day Winning Streak in 2019 01-13-19)
While stocks broke a 5-day winning streak on Friday, the major indices all finished the week with significant gains, and now a large part of the December rout has been erased. While it’s too early to conclude that we are out of the woods, a lot of signs point to a sustainable rally, and the most worrisome trends of the past few months have all reversed. Credit markets, which have been under considerable stress, recovered well, the battered Russell 2000 (the main small-cap index) led the way higher in recent weeks, and volatility fell substantially compared to the panicky conditions we saw during the holiday week. That said, a lot of very important stocks are still in trouble, and there is plenty of ground to cover before the key benchmarks reach their all-time highs.
There were only a few key economic releases this week, and the Federal Reserve stole the show yet again, as investors have been paying even more attention than usual following the recent dovish shift by Chairman Jerome Powell. The minutes from the latest FOMC meeting delivered another dovish surprise, as they revealed that several members would have preferred to leave the Fed’s benchmark rate unchanged, even though the monetary statement did not reflect those opinions. Mr. Powell and other committee members confirmed the Central Bank’s cautious stance during the week, and given the stable domestic economy, the Fed could be in for heated meetings, as although the ISM non-manufacturing PMI missed expectations, the Consumer Price Index (CPI) and the new jobless claims number were strong.
The technical picture improved yet again, and although the most important trend indicators still signal a declining short-term trend, the bull market continues, with the broadest trendlines providing support for the major indices during the recent correction. That said, the benchmarks are still slightly below their flattening 50-day moving averages, and the Nasdaq, the S&P 500, and the Dow are also below their declining 200-day moving averages. Despite showing relative strength for the second week in a row, the Russell 2000 is also well below both its short and long-term moving averages. The Volatility Index (VIX) continued to drift lower, and it finally fell below the widely-watched 20 level toward the end of the week, closing near 18 on Friday; its lowest level since early December.
Market internals continued to recover as well, thanks to the broad-based rally on Wall Street, but the levels of the most reliable measures still warrant caution. The Advance/Decline line still shows a positive divergence compared to the major indices, and it hit its highest level in over a month, as advancing issues outnumbered declining stocks by a 5-to-1 ratio on the NYSE, and by a 6-to-1 ratio on the Nasdaq. The average number of new 52-week highs remained very low on both exchanges, edging higher to 12 on the NYSE and 28 on the Nasdaq. The number of new lows continued to decline, falling to 9 on the NYSE and 14 on the Nasdaq. The percentage of stocks above their 200-day moving average jumped higher, crossing the 20% level, but Friday’s 23% is still far from healthy.
Stocks experienced the strongest short squeeze since the end of the last bear market in March of 2009, and while short interest collapsed on Wall Street, the most-shorted issues outperformed the broader market again. Akcea Therapeutics (AKCA) has been showing stability, and given its short interest of 52%, the stock could be ready to take off soon. Battered toymaker Mattel (MAT) continued to surge higher this week, and since its days-to-cover (DTC) ratio increased to 14, we may have a strong short squeeze on our hands. Iron Mountain (IRM) also has a very high DTC ratio of 12, but the stock has been steadily rising so far this year, with technicals suggesting that the trend could continue.
We will have yet another relatively calm week with regard to economic releases, and for a change, the Fed might not be at the center of attention. The Producer Price Index (PPI) will come out on Tuesday, the Philly Fed Index will be released on Thursday, while Michigan Consumer Sentiment number will highlight Friday’s session. Following a string of downgrades, earnings season will finally start next week in earnest, with a focus on mega-cap banks. In addition to the other previously noted bank stocks, we will also hear from Bank of America (BAC), Wells Fargo (WFC), and Goldman Sachs (GS), and after the horrible December for financials, even small positive surprises may be enough to boost the sector and the broader market. Stay tuned!
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