State of the Stock Market Analysis for the Week Ending on November 11th, 2018 (Economic Numbers Boost Investor Confidence 11-11-18)
Although the week ended on a negative note after Thursday’s slightly hawkish Fed statement, a majority of stocks finished higher for the second week in a row. The midterms, which provided an unsurprising outcome were also in the spotlight, and stocks experienced a healthy post-election rally on Wednesday. While we saw a bearish shift later on, with the election risk now out of the way, equities could soon resume the march toward their all-time highs. The fact that the President spoke about compromises right after the vote is a plus, and with the market entering the best time of the year from a seasonality standpoint, bulls can rightfully be optimistic.
Economic numbers continued to boost investor confidence, and despite the multi-year highs in Treasury yields, growth remains robust in almost every sector of the economy. The ISM non-manufacturing PMI, the Producer Price Index (PPI), and the preliminary Michigan Consumer Sentiment all beat the consensus estimates, with especially the services sector giving bulls a reason to smile. The consumer economy is still showing strong momentum in the face of the global slowdown, and although the JOLTS job openings number came in worse-than-expected, the labor market continues to support the boom. Going forward, inflation will likely be the most important risk factor for equities, and the huge jump in the PPI confirmed this yet again.
The technical picture improved somewhat last week, and although the major indices have diverged significantly in recent weeks, there is no doubt that stocks are still in a bull market. The Nasdaq and the S&P 500 are still below their declining 50-day moving averages, but the relatively strong Dow managed to close the week above both its short and long-term indicators. The S&P 500 is just above its 200-day moving average thanks to the bounce, but the lagging Nasdaq is below its key indicators. Small-caps are still very weak compared to the broader market, and the Russell 2000 remains well below both its declining 50-day and 200-day moving averages, despite the strong two-week rally. On a positive note, the Volatility Index (VIX) closed the week near 17, after plunging below the key 20 level after the elections.
Market internals are confirming the broad rally in stocks, even after the Friday pullback, and although bulls are not out of the woods yet, the most reliable measures have been consistently bullish over the past two weeks. The Advance/Decline line continues to be well above its October low, and although it declined toward the end of the week, advancing issues still 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 rose for the second week in a row, climbing to 54 on the NYSE and 51 on the Nasdaq. The number of new lows collapsed in the meantime, falling to 67 on the NYSE and 86 on the Nasdaq. The percentage of stocks above their 200-day moving average was virtually unchanged last week, but Friday’s 29% is still low by bull market standards.
Shorts got hit hard several times in the last couple of weeks and some analysts called the post-election rally the short squeeze of the decade. Revlon (REV) surged higher on Friday thanks to the company’s great earnings report, and the more than 30% rally could be the start of a short squeeze since the stock has a short interest of 42%. Iron Mountain (IRM) had a very strong week after two months of steep declines, and given its days-to-cover (DTC) ratio of 14, the recovery could even accelerate in the coming weeks. Current GorillaPick, Hormel Food (HRL), got very close to its all-time high (from 2016) despite the recent correction, and since the stock sports a DTC ratio of 13, a move to new highs could be ahead.
We will have another busy week regarding economic releases, but compared to last week, technicals will likely have a much larger impact. The Consumer Price Index (CPI) and the retail sales report are the most-awaited releases, and following the sky-high PPI reading, inflation will arguably be the key topic of the week. The Dow has spearheaded this month’s advance so far, and should the lagging Nasdaq finally join the party, we could soon see new all-time highs across the board again. With the riskiest events now behind us, the favorable seasonality, together with the record level of corporate profits and the healthy trend in the economy, it should be enough to support another leg higher in the bull market. Stay tuned!
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