State of the Stock Market Analysis for the Week Ending on March 3rd, 2019 (A Choppy and Eventful Week on Wall Street 03-03-19)

All You Need Is Jobs

We had a choppy and eventful week on Wall Street, and although stocks had plenty of opportunities to move lower in light of the negative catalysts, the market showed impressive resilience. The major indices quickly recovered from the, sometimes scary, overnight selloffs. And while the benchmarks failed to gain significant ground, the low-volatility consolidation confirmed the bullish underlying trend again. The conflict between India and Pakistan, the Brexit chaos, and the resurfacing trade worries all weighed on investor sentiment, but the extension of the trade ‘truce’ and the rising probability of a delayed Brexit process were enough to outweigh the uncertainties. The fact that equities managed to finish the week on a positive note, in the face of numerous disappointing economic releases, proved the strength of the underlying trend again.

The technical picture continues to improve slowly on Wall Street, with bulls now eyeing the major indices’ all-time highs again. The key trend indicators are now all pointing higher, and the S&P 500, the Dow, and the Nasdaq are all above their rising 200-day moving averages, while each is still well above their rising 50-day moving averages. Although small-caps had a few weaker sessions this week, the Russell 2000 continues to lead the way higher. The index remains a hair below its 200-day moving average, but it is clearly above its short-term moving average. The Volatility Index (VIX) finished the week higher, getting back above the 14 level due to the slight correction. However, it remains very low compared to the average of the past few months.

Market internals deteriorated somewhat due to this week’s pullback, however, the most reliable breadth measures continue to support the bullish case thanks in part to the relative strength in small-caps. The Advance/Decline line drifted lower throughout the week, before spiking higher on Friday, as advancing issues outnumbered declining stocks by a 2-to-1 ratio on the NYSE, and by a 3-to-1 ratio on the Nasdaq. The average number of new 52-week highs ticked lower on both exchanges, falling to 112 on the NYSE and 91 on the Nasdaq. The number of new lows slightly increased in the meantime, rising to 13 on the NYSE and 15 on the Nasdaq. The percentage of stocks above their 200-day moving average also fell back below 50% this week, amid the broad consolidation. However, Friday’s 49% reading is still promising for the coming weeks.

Short interest continued to decline on Wall Street, and it is now very close to its generational low from last year, as shorts have been seriously burned by the post-Christmas rally. Akcea Therapeutics (AKCA) spiked higher this week, breaking out of its six-month-long correction pattern, and since the stock still sports a short interest of 45%, a substantial advance could already be underway. Home furnishing company, RH (RH), continued to push higher all week long, and although its short interest declined to 37%, there are still plenty of shorts to fuel the rally. Current GorillaPick, Sempra Energy (SRE), hit its highest level since September this week, and since the stock has a very high days-to-cover (DTC) ratio of 12, it could be headed for new all-time highs.

The first full week of March will be slower with regard to economic releases, but we will still have a few key reports coming out, with a focus on the labor and housing markets. Construction spending will be out on Monday, the ISM non-manufacturing PMI is due to be released on Tuesday, together with new home sales, while the trade balance and the ADP payrolls number is scheduled for Wednesday. Challenger job cuts will highlight the quiet Thursday session, while the government jobs report, housing starts, and building permits are all due to be released on Friday. Considering the recent uptick in some of the key forward-looking measures, and the rally in Treasury yields, the hourly earnings figure could have the biggest impact. The Fed is quickly running out of reasons to keep interest rates on hold, and should inflation pick up again, we could be in for another big shift in the bond market. Stay tuned!


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