State of the Stock Market Analysis for the Week Ending on December 2nd, 2018 (A Busy Week for Wall Street 12-2-18)

All You Need Is Jobs

We had another volatile and busy week on Wall Street, and despite the mixed catalysts, the major indices gained significant ground. The Fed’s dovish shift, which was anticipated by bond investors, caused the strongest rally in stocks this year, but the positive Black Friday reports and the hopes regarding a trade agreement with China also boosted investor sentiment. That said, the nervousness of the recent weeks continued to affect the stock market, and given the persistent weakness in European and Asian markets, investors still have a steep “Wall of Worry” to climb. As we head into December, the key benchmarks are virtually unchanged for the year, but bulls hope that we will close the third year in a row in the green on the heels of this week’s bounce.

The rally in stocks has been especially bullish since most of the week’s economic numbers missed expectations, albeit by small margins. Personal spending and personal income provided the only positive surprises of the week, besides the Chicago PMI, but those indicators are more important than usual ahead of the holiday season. The CB Consumer Confidence number ticked lower, while the second reading of the third quarter GDP growth also provided a small disappointment, similar to the Richmond Manufacturing Index. While the housing sector has been showing signs of stability this month, pending and new home sales, and the Case-Shiller HPI all missed consensus estimates. New jobless claims increased unexpectedly for the second week in a row, and the slight weakness in economic activity could have played a part in the Fed’s dovish shift.

The technical picture improved somewhat thanks to the healthy bounce, but the short-term trend is still neutral, at best, following the deepest correction on Wall Street since February. The Nasdaq and the S&P 500 are both still below both their 50- and 200-day moving averages, despite the rally, while the relatively strong Dow managed to recover above its long-term indicator. The mega-cap benchmark is still below its declining short-term indicator, but that could soon change given the proximity of its moving average. Despite its recent stability, the Russell 2000 is still well below both its 50- and 200-day moving averages, while being far below its all-time high as well, following the steep drop in October. The Volatility Index (VIX) drifted sideways last week, and since it closed near the key 20 level, traders likely expect more volatility in December.

Market internals were in-line with the price action in the major indices last week, and for now, the most reliable measures are not showing consistent divergences, which may give us some clues for the coming week. The Advance/Decline line rose significantly last week, as advancing issues outnumbered declining stocks by a 4-to-1 ratio on the NYSE, and by a 5-to-1 ratio on the Nasdaq. The average number of new 52-week highs bounced back slightly on both exchanges, rising to 30 on the NYSE and 28 on the Nasdaq. The number of new lows fell significantly in the meantime, dropping to 187 on the NYSE and 127 on the Nasdaq. The percentage of stocks above their 200-day moving average got back above 25%, thanks to the broad-based rally, but Friday’s 26% still points to weak participation in the bull market.

Short interest declined substantially following the words of Fed Chair Jerome Powell, as bears were running for the exits in fear of an easier-than-expected Fed in 2019. Among the numerous outstanding performers, Akcea Therapeutics (AKCA) continued to deliver great returns, and with its short interest still at 49%, there could be plenty of fuel left in its tank. While Ubiquiti Networks (UBNT) edged slightly higher last week, its bullish consolidation pattern, coupled with its short interest of 43% could mean that the stock may be about to pop higher. Henry Schein (HSIC) popped up on the list of stocks with the highest days-to-cover (DTC) ratios, with a reading of 12, and since the stock is trading just below its all-time high, shorts could get squeezed following a breakout in the coming weeks.

While trade tariffs will be at the center of attention in the aftermath of the G20 summit, there will also be key economic releases coming out throughout the week as well. The ISM manufacturing and non-manufacturing PMIs are scheduled for Monday and Wednesday respectively. The trade balance and factory orders will be out on Thursday, and on Friday we will have the government jobs report. Although the uncertainty regarding the Fed’s rate hike schedule decreased substantially, a higher-than-expected wage growth figure could revive inflation fears. The preliminary Michigan Consumer Sentiment number will also come out on Friday, and the energy sector could see additional volatility in the second half of the week, due to the OPEC’s scheduled meeting. Stay tuned for another busy week!


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