State of the Stock Market Analysis for the Week Ending on March 17th, 2019 (The Largest Pullback of the Year 03-17-19)

All You Need Is Jobs

The major indices stormed back this week following the largest pullback of the year thus far, and although the troubles of Boeing (BA) weighed heavily on the Dow, the Nasdaq and the S&P 500 surged to new multi-month highs. Thanks to the spectacular post-Christmas rally, the benchmarks are now only a few percentage points from their all-time highs, and even the most bearish analysts agree that it was too early to call the end of the longest bull market in history last year. Besides the Boeing scandal, the never-ending Brexit saga was at the center of attention all week long, and the series of crucial votes ended with a positive vote on the extension of the March 29th deadline on Thursday. While the framework and the timeline of the process are still unclear, the extension could mean that we will avoid a risky no-deal Brexit.


We had a mixed week regarding economic releases, but Treasury yields edged lower, even as global risk assets rallied, meaning that investors aren’t expecting any rate hikes in the coming months. With the Fed’ s meeting looming, the Consumer Price Index (CPI) and the Producer Price Index (PPI) made the biggest waves, as both hinted at easing inflationary pressures in the economy. The delayed January retail sales report was a positive surprise, but core durable goods orders disappointed in the first month of the year. The Empire State Manufacturing Index and industrial production also confirmed the gloomy outlook for the manufacturing sector, which has been at the epicenter of the global economic slowdown. The jobs market, on the other hand, still looks robust, with the JOLTS job openings number surging to a new all-time high, while the better-than-expected Michigan Consumer Sentiment number is also promising for the consumer economy.


The technical picture improved significantly thanks to the swift recovery in the major indices, and the key trend indicators continue to confirm the strong uptrend in stocks. The S&P 500, the Nasdaq, and the Dow are now all back above their rising 200-day moving averages, and the benchmarks are also well above their rising 50-day moving averages. Despite months of above-average returns, the Russell 2000 is still below its long-term moving average, while the small-cap index remains above its short-term moving average. The Volatility Index (VIX) closed the week around the 12 level for the first time since early-October, and thanks to the improving investor sentiment, the fear gauge’s reading is now consistent with a healthy bull market.


Market internals staged a rebound together with the major indices following two weeks of deterioration, and although some of the most reliable measures are still flashing red, the overall picture is bullish. The Advance/Decline line hit a new bull market high this week, confirming the rally, as advancing issues outnumbered declining stocks by a 4-to-1 ratio on the NYSE, and by a 6-to-1 ratio on the Nasdaq. The average number of new 52-week highs rose sharply on both exchanges, climbing to 131 on the NYSE and 85 on the Nasdaq. The number of new lows edged lower in the meantime, falling to 18 on the NYSE and 38 on the Nasdaq. The percentage of stocks above their 200-day moving average surged higher thanks to the broad-based rally, nearly topping 50% on Friday, and the closing reading of 49% is especially promising for bulls.


Short interest continued to decline across the board, thanks to the plunge in volatility and the quick recovery from last week’s correction, and we are getting closer to the generational lows of 2017 with regards to bearish bets. Carvana (CVNA) had another positive week, gaining more than 10% amid the broad rally, and its short interest is still at 58%, which could spell further pain for shorts. Oil & gas company EQM, (EQM) is also having a bullish month, and its short interest of 60% could propel the stock even higher in the coming weeks. Current GorillaPick, Sempra Energy (SRE), completed the break-out that we expected, and although shorts of the stock have slowly been squeezed all year, its days-to-cover (DTC) ratio of 13 is still sky high.


While the coming week will be relatively light in terms of key economic releases, the Fed’s rate decision and statement have the potential to cause turmoil in financial markets on Wednesday. The Central Bank is expected to leave its benchmark rate unchanged, but the devil will be in the details of the monetary statement. In light of the recent rebound in economic numbers, a hawkish surprise could be in the cards, even as this week’s inflation-related indicators were weaker-than-expected. Besides the Fed decision, the NAHB Housing Market Index will be out on Monday, building permits will be released on Tuesday, the Philly Fed Index will highlight Thursday’s session, while existing home sales are scheduled for Friday release. Stay tuned for another exciting week!


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