State of the Stock Market Analysis for the Week Ending on April 7th, 2019 (Political Turmoil and Mixed Economic Numbers 04-07-19)
Judging by the headlines, we had yet another week of political turmoil and mixed economic numbers, especially in Europe. Proving the risk-on shift in sentiment, investors seemingly ignored the continued Brexit chaos and the slowing global economy and pushed stocks higher across the globe. On Wall Street, we had a relatively quiet and bullish week on the heels of the very strong Monday session that ended the late-March pullback. China and the trade talks between U.S. and China provided the most important positive catalysts this week, as a key manufacturing measure showed a strong rebound in the country, while trade negotiations reportedly entered their final stages. President Trump also made waves yet again, first with his proposal to fully close the Mexican border, then with his latest call for an even more dovish Fed on Friday.
Domestic economic numbers were mixed following last week’s negative surprises, but overall, there were no signs of the sharp global slowdown that has dragged equities lower in Europe and China. On the negative side, the delayed February retail sales number missed across the board, the ISM non-manufacturing PMI came in at 56.1, slightly below the consensus estimate, while durable goods orders were also unexpectedly weak. The ISM manufacturing PMI, on the other hand, bounced higher, defying the global trends, while the job market remained very strong according to nearly all measures. Non-farm payrolls rose by 196,000 following last month’s huge disappointment, and while wage growth slowed down in March, the unemployment rate remains near its multi-decades low.
The technical picture is as bullish as it gets on Wall Street, with the major indices all being in advancing short and long-term trends according to the key trend indicators. The Dow, the S&P 500, and the Nasdaq are all above their rising 200-day moving averages, while also being well clear of their steeply rising 50-day moving averages. And now, all three benchmarks have completed the ‘golden cross’ pattern. After showing signs of strength last week, small-caps finally joined the rally in earnest this week, and the Russell 2000 closed above both its short and long-term moving averages for the first time since September. The Volatility Index (VIX) hit its lowest level in six months on Friday, as it closed the week near 12, which is consistent with a healthy bull market.
Market internals improved significantly thanks to the broad-based push higher, and although some of the most reliable measures still have room to improve, the bull market has a solid foundation. The Advance/Decline line continued to march to new all-time highs, as advancing issues outnumbered declining stocks by a 5-to-1 ratio on the NYSE, and by a 6-to-1 ratio on the Nasdaq. The average number of new 52-week highs increased on both exchanges, rising to 137 on the NYSE and 90 on the Nasdaq. The number of new lows declined in the meantime, dropping to 12 on the NYSE and 37 on the Nasdaq. The percentage of stocks above their 200-day moving average continued to increase thanks to the rally in small-caps, as the indicator closed the week above 56% for the first time in six months.
Short interest declined once again on Wall Street, and with the major indices approaching their all-time highs, more and more bears will likely be looking for the exits in the coming weeks. Akcea Therapeutics (AKCA) continues to show promising technical signs, and backed by its short interest of 49%, the stock could be in for a significant rally. Iron Mountain (IRM) is sporting a very high days-to-cover (DTC) ratio of 15, and Friday’s breakout could mark the beginning of a short squeeze following two months of consolidation. The short squeeze is already underway in current GorillaPick, Sempra Energy (SRE), and even after three bullish months, the utility company still has a DTC ratio of 13, which could mean that further gains are ahead for the stock.
We will have a relatively calm week with regards to domestic economic releases, and all eyes will be on Europe, as on Friday, the Brexit saga could end with the feared no-deal option. The European Union will hold an emergency meeting starting Wednesday, and due to the developments of the past few days, investors are hoping for a longer extension to the deadline, even though the June 30th date proposed by the UK looks uncertain. Wednesday will also see the release of the Consumer Price Index (CPI) and the minutes from the latest Fed meeting, which have the potential to make waves in financial markets too. With the bullish technicals in mind, a pullback could provide a great buying opportunity for investors, and even a no-deal Brexit would likely leave the advancing trend intact in stocks. Stay tuned!
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