State of the Stock Market Analysis for the Week Ending on May 5th, 2019 (Busy Week on Wall Street | State of the Stock Market 05-05-19)
We had one of the busiest weeks of the year so far on Wall Street, with key earnings, a Fed rate decision, and a slew of crucial economic releases making waves throughout the week. Stocks also had their most volatile two-day period since late-March following the slightly disappointing Fed announcements, but although the most-anticipated earnings were mixed, the major indices showed resilience yet again. The Dow remains the weakest benchmark, while the Nasdaq continues to pull its weight, even though Alphabet (GOOGL) was the biggest negative surprise of the week with regard to earnings. Apple (AAPL), on the other hand, had a great first quarter. Healthcare giants Pfizer (PFE) and Merck (MRK) also rallied in the wake of their reports, while Mastercard (MA) and McDonald’s (MCD) were among the weaker stocks post-earnings.
Economic numbers were a mixed bag following two bullish weeks, especially taking the weak international trends into account, with the manufacturing sector creating the biggest headache for investors. The Chicago PMI and the ISM manufacturing PMI both missed by a hefty margin, and although factory orders were stronger-than-expected, the outlook is still deteriorating for the globally weak sector. We received lots of reassuring inflation-related indicators this week, but the positive effects of the lower-than-expected Core PCE Price Index and average hourly earnings were muted by Fed Chair Jerome Powell‘s words that the low level of inflation is likely transitory. The government jobs report provided the most significant positive surprise of the week, as non-farm payrolls surged higher by 263,000, while the unemployment rate fell to 3.6%. The CB Consumer Confidence number also beat expectations, so the consumer economy is still clearly booming.
While the divergence between the major indices is notable and the market is ripe for consolidation after four bullish months, the technical picture remains positive. The S&P 500, the Nasdaq, and even the lagging Dow are all above their rising 200-day moving averages, while also above their steeply rising 50-day moving averages, even in the wake of the post-Fed pullback. The wild swings in Treasury yields did not help the relatively weak small-caps, but the Russell 2000 bounced back strongly toward the end of the week, and it remains above both its short and long-term moving averages. The Volatility Index (VIX) spiked as high as 16 on Thursday, closing above its 50-day moving average for the first time since March. However, it fell sharply on Friday to close the week near the 13 level again.
Although the mid-week dip affected market internals as well, the most reliable measures all showed resilience, which is an encouraging sign for bulls ahead of the summer period of bearish seasonality. The Advance/Decline line surged to a new bull market high on Friday, erasing its shallow correction, as advancing issues outnumbered declining stocks by a 4-to-3 ratio on the NYSE, and by a 3-to-2 ratio on the Nasdaq. The average number of new 52-week highs increased on both exchanges, rising to 128 on the NYSE and 96 on the Nasdaq. The number of new lows decreased in the meantime, falling to 26 on the NYSE and 43 on the Nasdaq. The percentage of stocks above their 200-day moving average was stable despite the volatile days, as the indicator finished near 58% once again on Friday.
Short interest declined slightly on Wall Street thanks to the generally positive earnings, and the overall number of bearish bets remains near its yearly low thanks to the relentless rally in stocks. While Revlon (REV) is still well below its November high following its steep drop in March, the rally of the past couple of weeks is a positive sign, and given the stock’s short interest of 45%, the recovery could continue in the weeks ahead. Investors of Gogo Inc. (GOGO) had a frustrating April, as the stock failed to add to its early-month gains, but with its short interest still being at 60%, a short squeeze remains a possibility. Snap-on (SNA) continued to consolidate this week, and given the stock’s very high days-to-cover (DTC) ratio of 14, another breakout could be ahead.
Following this week’s very busy schedule, we will only have a few key economic releases coming out next week, but inflation will likely remain in the spotlight, especially in the wake of the debate about rates between the Fed and the White House. The JOLTS Jobs openings estimate will be released on Tuesday, but Thursday’s Producer Price Index (PPI) and Friday’s Consumer Price Index (CPI) report will have real potential to move the market. The current level of inflation is consistent with the Fed’s benchmark rate, but should the indices confirm that prices will rise quicker in the coming months, rate hikes could become likely again, which would have a profound effect on Treasury yields, and likely stock prices as well. The trade talks with China may also be back in the spotlight, but even though recent reports suggest a deal by the end of the week, that may prove to be too optimistic. Stay tuned!
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