State of the Stock Market Analysis for the Week Ending on January 27th, 2019 (An Overall Bullish Week 01-27-19)

All You Need Is Jobs

While the holiday-shortened week was packed with negative headlines, mixed economic numbers, and the stock market was ripe for a correction following the post-Christmas surge. The longest government shutdown in history (which finally ended on Friday), the mixed comments regarding trade talks with China, and the weakest economy in Europe and China in years were not enough to halt the rally on Wall Street. Earnings season continued in earnest, with companies totaling more than $1.5 trillion in market cap reporting during the week, and most of the key companies enjoyed gains after publishing their quarterly numbers. While there were some negative surprises as well, such as Intel’s (INTC) weak guidance, the overall picture is still bullish, despite the global economic slowdown and the recent turmoil in financial markets.


The week kicked off with the lowest Chinese GDP print since 1990, and continued with a string of dismal releases from Europe, but the key domestic indicators remained stable. Only the battered housing market showed some troubling signs, with existing home sales coming in at 4.99 million, the lowest annualized figure since 2015. Weekly new jobless claims came in below 200,000, and the forward-looking labor market indicator hit its lowest level since 1969. The Manufacturing and Services PMIs both beat expectations, and following the positive surprise in the Philly Fed Index, we can now say that the manufacturing sector is still expanding at a healthy pace, in the face of the sharp global slowdown.


The technical picture continued to improve despite the shallow dip, but due to the deep year-end correction, the most important trend indicators are still mixed. The major indices stayed above their flattening 50-day moving averages throughout the week, but the Nasdaq, the S&P 500, and the Dow are still well below their flattening 200-day moving averages. The Russell 2000, which continues to be a great indicator of risk appetite, gathered relative strength yet again during the early-week pullback, and the index also remains above its declining short-term moving average, while being far from its long-term indicator. And although the Volatility Index (VIX) surged higher on Tuesday, briefly topping the 22 level, it closed the week near the 18 level again, thanks to the late-week recovery in stocks.


While small-caps lagged the broader market for a few days, market internals also continued to improve on a weekly basis, as the most reliable measures are largely back to their normal bull market levels. The Advance/Decline line continued to diverge from the major indices in a bullish fashion, as advancing issues outnumbered declining stocks by a 3-to-1 ratio on the NYSE, and by a 2-to-1 ratio on the Nasdaq. The average number of new 52-week highs ticked higher again on both exchanges, increasing to 26 on the NYSE and 32 on the Nasdaq. The number of new lows also increased, rising to 19 on the NYSE and 29 on the Nasdaq. The percentage of stocks above their 200-day moving average continued to increase too, topping 28% on Friday, as the most bearish indicator is finally showing signs of healing.


The most-shorted issues outperformed the broader market yet again, especially in the second half of the week, and short interest remains very low on Wall Street following the epic post-Christmas short squeeze. Accelerate Diagnostics (AXDX) continued its relentless rally, and the stock is now up by almost 50% this year, boosted by its very high short interest of 54%. Auto dealership Carvana (CVNA) also registered lofty gains this month, and since it has a short interest of 52%, the short-covering rally could continue in the coming weeks. Microchip Technologies (MCHP) broke out of its recent trading range on Friday, and given its days-to-cover (DTC) ratio of 12, this move may just be the beginning.


While we already had a week packed with central bank-related developments, like the monetary meetings of the Bank of Japan (BOJ) and the European Central Bank (ECB), and the reports regarding an early end to the Fed’s quantitative tightening program, monetary policies will likely take center stage next week as well. The Fed is expected to leave its benchmark rate unchanged on Wednesday, but the Bank’s monetary statement will be crucial following the recent dovish shift by Chairman Jerome Powell. Earnings season will kick into high gear next week, and we will also have the CB Consumer Confidence number on Tuesday, and the government jobs report and the ISM manufacturing PMI on Friday, so we are likely to have another action-packed week. Stay tuned!

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