State of the Stock Market Analysis for the Week Ending on December 9th, 2018 (Most Volatile Decembers in History on Wall Street 12-23-18)

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We are having one of the most volatile Decembers in history on Wall Street, and the correction that started in October further deepened during the last full trading week of the year. While it’s hard to pinpoint one reason behind the steep selloff, the Federal Reserve’s fourth rate hike of the year on Wednesday certainly didn’t help, especially following two months of falling yields in the bond market. The hawkish words of Fed Chair Jerome Powell with regards to the Central Bank’s balance sheet only added to worries, and the selling pressure remained clear in the latter half of the week. The major indices all hit new correction lows, and the Dow, the Nasdaq, and the S&P 500 are now at their lowest levels in more than a year.

Economic numbers are still solid, especially compared to the sentiment on the Street and the price action in stocks, although we saw some weakness in the more forward-looking indicators during the week. The durable goods report missed expectations across the board, with both the headline and the core measure ticking lower, while the Philly Fed Index also hinted at a slowdown in the manufacturing sector. On the other hand, the CB Leading Index, personal spending, and the revised Michigan Consumer Sentiment numbers were all stronger-than-expected, while the battered housing market provided the most positive catalyst. Building permits, housing starts, and existing home sales all came in well above consensus estimates, and given the continued decline in yields, the recovery in the housing market could continue over the coming months.

The technical picture got even bleaker due to the sharp decline, as the short-term trend remains clearly negative on Wall Street. While the long-term picture is also the gloomiest we’ve seen in years, the bullish underlying trend is still intact. The major indices are still well below their declining 50-day moving averages, and the Nasdaq, the S&P 500, and the Dow are also all below their declining 200-day moving averages. Small-caps continued to perform poorly as well, and the Russell 2000 remained below both its 50- and 200-day moving averages, while hitting its lowest level since late in 2016. Additionally, the Volatility Index (VIX) spiked above the 30 level for the first time since February. And while the index still shows a positive divergence compared to the key benchmarks, its closing level of 28 is very high for the month of December.

Market internals continued to deteriorate due to the relative weakness in small-caps, and the most reliable measures are still confirming the bearish price action. The Advance/Decline line plunged lower together with the major indices, as declining issues outnumbered advancing stocks by a 6-to-1 ratio on the NYSE, and by a 5-to-1 ratio on the Nasdaq. The average number of new 52-week highs fell further on both exchanges, dropping to 4 on the NYSE and 10 on the Nasdaq. The number of new lows exploded higher, rising to 914 on the NYSE and 869 on the Nasdaq. The percentage of stocks above their 200-day moving average continued to decline, hitting its lowest level since 2016, and closing the week near 12%.

While short interest increased considerably following the Fed’s rate hike, it remains low from a historical perspective, even as the most-shorted issues failed to perform better than the broader market in the nervous environment. Although Revlon (REV) finished the week in the red, it continued to outperform the key benchmarks, and its short interest remains very high at 42%. Iron Mountain (IRM) also declined following two promising weeks, but it is still well north of its October low, and its days-to-cover (DTC) ratio of 12 could be very promising for the coming weeks. Hormel Food (HRL) sports a DTC ratio of 12 as well, and although the stock has been drifting lower since mid-November, its technical position remains very strong.

The week of Christmas is usually a very quiet and choppy one, but this year, the recent volatility in stocks will likely have a profound effect on the illiquid holiday market, possibly leading to wild swings in both directions. As for economic releases, the Case-Shiller Housing Price Index will come out on Wednesday, CB Consumer Confidence number will be released on Thursday, while the Chicago PMI and we will see pending home sales on Friday. Thus, the holiday-shortened week could still provide some surprises for investors, but bulls hope that following one of the worst Decembers ever, we will, at least, be able to close the year on a positive note. Stay tuned!

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