State of the Stock Market Analysis for the Week Ending on December 8th, 2019 (Let’s Talk “Phase One” | State of the Stock Market 12-08-19)
Although the still ongoing trade talks with China remained in focus throughout the week, we still don’t know what the fate of the highly-anticipated “phase-one” deal will be. The President’s words regarding a possible major delay caused a spike in volatility and a dip in stocks that reached its deepest point on Tuesday, but the subsequent upbeat reports helped to calm nerves on Wall Street. The roller-coaster ride was also fueled by mixed domestic economic releases, but “under-the-hood,” there was no sign of deterioration, with the majority of stocks holding up well in the face of the selling pressure. OPEC’s meeting also made headlines in the latter half of the week, and as was widely expected, the cartel agreed to curb its supply further, boosting the price of crude and, in turn, the energy sector.
The week started in a negative fashion in terms of economic releases as well, but the second half of the week saw a string of positive surprises, making the picture neutral at worst. The ISM manufacturing and non-manufacturing PMIs both missed expectations, and while the manufacturing measure signaled contraction yet again, the services sector remains very strong, especially in an international comparison. The much better-than-expected non-farm payrolls number, together with the positive revision of last month’s figure, created a strong rally in risk assets on Friday. The unemployment rate fell unexpectedly to 3.5%, and even though wage growth disappointed, the labor market remains healthy.
The technical picture continues to be bullish across the board, despite the early-week dip, as the major indices finished just below their all-time highs from last week thanks to the quick recovery. The S&P 500, the Nasdaq, and the Dow are still well above their rising 200-day moving averages, and the benchmarks also remain above their steeply rising 50-day moving averages as well. Small-caps surged higher late in the week. The Russell 2000 was the first index to erase the pullback in the wake of the blowout jobs report, as it closed well above both its moving averages. The Volatility Index (VIX) had a tumultuous week, in-line with the price action in stocks, as it spiked up to 18 on Tuesday, its highest level in two months, only to close slightly above 13.5 on Friday.
Market internals recovered well thanks to the relative strength of small-caps, and the most reliable indicators continue to point higher, despite their late-November weakness. The Advance/Decline line hit yet another new bull market high on Friday, as advancing issues outnumbered decliners by a 4-to-3 ratio on the NYSE, and by a 5-to-4 ratio on the Nasdaq. The average number of new 52-week highs declined on both exchanges, falling to 54 on the NYSE and 59 on the Nasdaq. The number of new lows slightly increased in the meantime, rising to 23 on the NYSE and 49 on the Nasdaq. The percentage of stocks above their 200-day moving average increased despite the pullback, and closed the week near 63%.
Even though short interest spiked higher in the first couple of days of the week, the most-shorted issues outperformed the broader market during the rebound, and the total amount of bearish bets was flat on a weekly basis. National Beverage (FIZZ) soared to a new seven-month high on Friday, thanks to its bullish earnings report, and with its short-interest still at 67%, the stock could be in for a short squeeze. Planet Fitness (PLNT) also hit a multi-month high this week, despite the broad pullback, and since it still sports a short interest of 49%, the rally could continue in the coming weeks. While Snap-On (SNA) is still trading in a long-term consolidation pattern, we saw a strong rally in the stock this week, and with its very high days-to-cover (DTC) ratio of 18 in mind, Snap-On could be gearing up for a breakout.
We will have another busy week of economic releases, but this time, the most important indicators are all scheduled for the latter half of the week. This could mean that volatility will decline further earlier on, barring yet another plot twist in the trade war saga. The Consumer Price Index (CPI) and the Producer Price Index (PPI) will be released on Wednesday and Thursday, respectively, but the Fed’s rate decision could steal the show on Wednesday. The British snap elections will also take place on Thursday, and while the governing Tory party is expected to win, we have learned to take election forecasts with a grain of salt in recent years. So, while there is a meaningful political risk to consider, the bullish technicals could lead to another string of new all-time highs in the major indices. Stay tuned!
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