State of the Stock Market Analysis for the Week Ending on December 9th, 2018 (Trade Truce Between President Trump and Chinese Leader Xi 12-9-18)

All You Need Is Jobs

We had yet another tumultuous week in the stock market, even though following the trade truce between President Trump and Chinese leader Xi, it seemed that the deep correction that started in October might finally have been behind us. While the negotiations between the two countries resumed after the much-awaited dinner in Buenos Aires, the odds of a quick agreement declined sharply due to the arrest of Huawei’s CFO on Wednesday. Treasury yields fell to multi-month lows across the curve, as investors now think that this month’s rate hike will be the last one by the Fed. The turmoil in the bond market also increased volatility on Wall Street. The mounting European troubles continued to weigh heavily on investor sentiment too, and the still robust domestic fundamentals were not enough to turn the bearish tide in stocks.

While economic releases were mixed, and the highly anticipated government jobs report missed expectations across the board, bulls still had plenty to cheer about. The unemployment rate was flat at 3.7% as expected and non-farm payrolls increased by 155,000, which was well below the consensus estimate of 198,000. And while hourly earnings only grew by 0.2% last month, the labor market still seems to be on track. The ISM manufacturing and non-manufacturing PMIs confirmed the healthy momentum in the economy yet again, coming in at 59.3 and 60.7 respectively, and both measures also beat analysts’ expectations in November. The preliminary Michigan Consumer Sentiment number was better-than-expected as well, which is another positive sign for the holiday season.

Even though the week started out on a positive note, the technical picture deteriorated due to the late-week plunge, and the short-term trend remains negative in the stock market. The Nasdaq, the S&P 500, and the relatively strong Dow are all back below their declining 50-day and flat 200-day moving averages. Additionally, the S&P 500 completed the “death cross” pattern on Friday, similar to the Nasdaq, since its short-term average fell below its long-term indicator. The Russell 2000 is also below its 50- and 200-day moving averages, and as small-caps were weak in comparison with the broader market, the benchmark closed at its lowest level since February on Friday. Although the Volatility Index (VIX) fell to as low as 15 on Monday, it surged higher amid the sell-off and finished near 23, well above the key 20 level.

Market internals were hurt by the broad-based decline, and the most reliable measures are still not showing meaningful positive divergences. The Advance/Decline line turned sharply lower during the shortened week, as declining issues outnumbered advancing stocks by a 3-to-1 ratio on the NYSE, and by a 4-to-1 ratio on the Nasdaq. The average number of new 52-week highs increased slightly on both exchanges, rising to 56 on the NYSE and 40 on the Nasdaq. The number of new lows surged higher in the meantime, jumping to 351 on the NYSE and 278 on the Nasdaq. The percentage of stocks above their 200-day moving average fell back below 25% again, closing the week at 20%, near its recent low. This indicator remains worryingly weak for bulls.

Short interest was virtually unchanged on Wall Street, despite the chaotic price action, as Monday’s short squeeze gave a lot of bears cold feet. Although, the most-shorted issues were hit hard in the second half of the week. Among the numerous outstanding performers, Match Group (MTCH) defied the late-week dip and continued its rally, and given its short interest of 43%, the stock could be a leader in the coming weeks. Iron Mountain (IRM) also performed relatively well, and since the stock sports a days-to-cover (DTC) ratio of 13, bears might remain buyers on the way up. Digital Realty Trust (DLR) is also on the list of the stocks with the highest DTC ratios, with a reading of 10, and since it edged closer to its all-time high last week, shorts could be in trouble soon.

We will have another busy week regarding economic releases, and inflation will be at the center of attention, with the Producer Price Index (PPI) and the Consumer Price Index (CPI) being scheduled for Tuesday and Wednesday, respectively. With all signs pointing to easing inflationary pressures in the economy, especially the falling price of oil, analysts expect flat headline and low core PPI and CPI figures. While the key retail sales report will also come out on Friday, the week’s most important event will take place in the UK, since the British Parliament will vote on the passage of the Brexit plan. Should the plan be rejected, the uncertainty regarding the British exit from the European Union could continue, which could mean that volatility is here to stay, despite the fact that we are in a typically calm and bullish period of the year. Stay tuned!

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