State of the Stock Market Analysis for the Week Ending on March 10th, 2019 (Stocks Entered Deepest Correction 03-10-19)

All You Need Is Jobs

Stocks entered their deepest correction of the year this week, and the fact that a 3% dip qualifies for that shows just how strong the advance of the past two months was. The recent relative weakness in small-caps once again correctly predicted the broad-based selloff, but considering that the Russell 2000 held up so well toward the end of the week, we could already be close to a bottom. Following the European Central Bank’s (ECB) meeting, the dollar hit its highest level since mid-2017, which likely contributed to the pullback with the more export-focused companies performing worse-than-average this week. While some analysts expected an announcement regarding the highly-anticipated trade deal with China, we still don’t know details about the negotiations, and that, together with the quickly approaching Brexit deadline weighed on investor sentiment.


The busy week kicked off with the very strong ISM non-manufacturing PMI, and the outlook for the domestic economy continues to be positive, especially in light of the deepening slowdown in Europe and China. Bulls suffered a major blow on Friday, as the government jobs report provided negative surprises. Payrolls only increased by 20,000, which is the worst reading in a year-and-a-half, while hourly earnings jumped by 3.4%, raising questions about inflation. On a positive note, the unemployment rate declined to 3.8%. On the same day, building permits and housing starts both beat consensus estimates, similar to Tuesday’s new home sales number, which could be a sign that lower mortgage rates are finally helping the battered sector.


The technical picture is mixed due to this week’s pullback, but the key trend indicators are still confirming the ongoing bull market, and the recovery could soon resume on Wall Street. The S&P 500 and the Nasdaq both dipped below their rising 200-day moving averages toward the end of the week, but the Dow is still above its long-term indicator. All three of the benchmarks are well north of their rising 50-day moving averages. The Russell 2000 dipped below its 200-day moving average, but the small-cap index is still well above its 50-day moving average, and it performed better than the broader market during the last two sessions of the week. The Volatility Index (VIX) hit 18.5, its highest level in more than a month on Friday, and it could quickly move back to the key 20 level next week, should the correction continue.


Market internals continued to deteriorate especially in the first half of the week, as the weakness in small-caps weighed on the most reliable breadth measures. The Advance/Decline line hit its lowest level in almost a month due to the correction, as declining issues outnumbered advancing stocks by a 3-to-2 ratio on the NYSE, and by a 3-to-1 ratio on the Nasdaq. The average number of new 52-week highs declined substantially on both exchanges, falling to 77 on the NYSE and 45 on the Nasdaq. The number of new lows increased in the meantime, rising to 38 on the NYSE and 45 on the Nasdaq. The percentage of stocks above their 200-day moving average fell sharply for the second week in a row, and closed near the 40% level on Friday.


Short interest ticked higher this week on Wall Street, but bearish bets remain near their lowest levels in decades, thanks to the longest bull market in history. Carvana (CVNA) continued to surge higher this week, and although the stock is up by more than 50% since early-February, it still has a short interest of 62%, so the rally may just be starting. While Mattel (MAT) drifted lower this week, it remains in a rising short-term trend, and since it sports a high days-to-cover (DTC) ratio of 10, shorts could propel the stock much higher in the coming weeks. Fastenal (FAST) also has a DTC ratio of 9, and after hitting a new all-time high last month, the stock could be ready for another bullish move as soon as the broad-based pullaback ends.


We are in for a relatively calm week concerning economic releases, but following the huge surprises in jobs numbers on Friday, financial markets will likely remain very active. Treasuries could continue to experience wild swings ahead of this month’s Fed meeting, but the low-volatility consolidation in stocks may also be over for good. Tuesday’s Consumer Price Index (CPI) will be the most critical indicator of the week since the retail sales and durable goods reports have been delayed due to the government shutdown. The Producer Price Index (PPI) will be out on Wednesday, new home sales are scheduled for Thursday, and the week will end with industrial production and the Michigan Consumer Sentiment number. Besides the inflation measures, the outcome of the trade talks with China and the possible Brexit delay could be crucial for stocks. Bulls are hoping that the major indices have found (or will soon find) a near-term bottom. Stay tuned!


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