State of the Stock Market Analysis for the Week Ending on February 10th, 2019 (Major Indices Post Mixed Returns 02-10-19)
Although the first week of February was far from disastrous on Wall Street, it was still the worst week since December, with the major indices posting mixed returns. The week started out on a positive note, as the post-Fed rally continued, carrying the benchmarks to their highest levels since early December. The growing fears regarding the global economy and the trade talks with China weighed on investor sentiment in the second half of the week, causing a dip in domestic equities amid a steep sell-off in Europe, where economic numbers further deteriorated. Despite the pullback, the indices are holding on to most of their post-Christmas gains, and in light of the relative strength of the riskier benchmarks (the Nasdaq and the Russell 2000), the recovery could continue.
Short-dated Treasury yields spiked higher briefly after Fed Chair Jerome Powell gave a surprisingly upbeat speech concerning the economy on Wednesday, but yields actually closed the week lower due to the late-week dip in risk assets. The few economic releases that came out were slightly bearish, with factory orders missing the consensus estimate by the largest margin. While the ISM non-manufacturing PMI was the most important release of the week, it also came in a tad below forecast. However, the 56.7 reading is still well above the global PMIs, signaling healthy expansion in the services sector. New jobless claims were also higher-than-expected for the second week in a row, coming in at 234,000. However, the data is likely distorted to some degree following the government shutdown.
The technical picture continues to improve, despite the orderly pullbacks, and although the key trend indicators are still showing a mixed picture, the effects of the year-end correction are fading. The major indices are all clearly above their rising 50-day moving averages. However, the Nasdaq and the S&P 500 are still below their 200-day moving averages, while the Dow closed right at its long-term indicator yet again. Small-caps were relatively strong again following a brief period of weakness, and although the Russell 2000 is still well below its long-term moving average, it is clearly above its short-term indicator. The Volatility Index (VIX) had an eventful week, as it first hit its lowest level since October, then spiked higher to a one-week high on Thursday, just to finish the week back below the 17 level.
Market internals took a small hit due to the Thursday decline and the preceding weakness in small-caps. However, the most reliable measures are still showing encouraging readings, and the recovery still does not appear to be in any danger at this point. The Advance/Decline continued to hit new highs in the first half of the week, and advancing issues outnumbered declining 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 on both exchanges, falling to 66 on the NYSE and 41 on the Nasdaq. However, the number of new lows was virtually unchanged, edging lower to 14 on the NYSE and 24 on the Nasdaq. The percentage of stocks above their 200-day moving average first increased to its highest level in four months, hitting 38% on Tuesday, but the indicator fell in the second half of the week, closing near 33% on Friday.
The most-shorted issues were better off than the broader market yet again, as the historic short squeeze continued on Wall Street, thanks in part to the Fed’s recent dovish shift. While Accelerate Diagnostics (AXDX) had a volatile and flat week, the stock is only slightly below its recent three-month high, and given its short interest of 56%, it could resume its strong rising trend soon. Microchip Technology (MCHP) hit its highest level since August after publishing its quarterly numbers, and given the fact that its days-to-cover (DTC) ratio is still 12, shorts could be squeezed even further in the coming weeks. Current GorillaPick, Sempra Energy (SRE), edged even closer to its recent all-time high, and in light of its DTC ratio of 11, it looks as though a move above $120 could cause the shares to rally.
Following a relatively quiet week of economic releases, at least on the domestic front, we will be in for a few very busy days in the second half of next week. Several key reports will be released for the first time since December due to the government shutdown. The retail sales report will be especially closely watched by investors on Thursday. The Producer Price Index (PPI) will also be released on Thursday, one day after the Consumer Price Index (CPI), while the first release of the Michigan Consumer Sentiment number will be published on Friday. All eyes will be on China next week, since the trade talks with the Trump administration will resume in Beijing, following several negative reports regarding the negotiations. While we aren’t expecting a final deal just yet, the current negative sentiment could easily turn positive. And the improvement in sentiment together with the bullish technicals, could be enough to fuel another leg higher in stocks. Stay tuned!
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