State of the Stock Market Analysis for the Week Ending on December 14th, 2019 (A Two-Faced Week in Financial Markets | State of the Stock Market 12-14-19)
We had a two-faced week in financial markets, as stocks drifted sideways until the Fed’s scheduled monetary meeting, consolidating just below their all-time highs following a crazy week. The Central Bank’s reassuring message and the continued trade optimism had already lifted equities and other risk assets following Wednesday’s Fed-announcement. Then reports regarding the finalized “phase-one” deal with China triggered a memorable surge to record highs on Thursday. The British snap elections were also keeping up investors at night, but this time, the projections regarding a relatively easy victory for the governing conservative Tory party proved to be correct. With that, bulls are hoping that the Brexit saga will finally come to an end in an organized fashion in the coming months.
The key economic releases were mixed once again, and even though we had important inflation indicators coming out, the Fed’s announcements and the political developments dwarfed their effect on stocks and bonds. The headline Consumer Price Index (CPI) was a tad higher-than-expected at 0.3%, but the core CPI, the headline Producer Price Index (PPI), and the core PPI all missed the consensus estimates. The core PPI dipped into negative territory for the third time in five months, and since the Fed and the European Central Bank (ECB) both pledged to keep interest rates extremely low until they notice a meaningful uptick in inflation, easy monetary policies are likely here to stay for the time being. The retail sales report was clearly bearish, with both the headline and the core measure missing the consensus estimates, which is a slightly worrying sign in regards to holiday sales.
The technical picture continues to be as bullish as it gets, though, with all of the key trend indicators pointing higher in all of the major indices. 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 remained upbeat amid the positive news flow, and the Russell 2000 hit its highest level since last year’s deep correction, closing the week well above both of its moving averages. The Volatility Index (VIX) had another very active week, as it surged higher ahead of the Fed decision and the British elections, before dropping back below 14, and finishing near the 12.75 level.
Market internals continued to improve thanks to the new all-time highs and the rally in small-caps, and at this point, it’s hard to find an even slightly worryisome breadth indicator. The Advance/Decline line continued to hit new bull market highs this week, as advancing issues outnumbered decliners by a 4-to-1 ratio on the NYSE, and by a 5-to-1 ratio on the Nasdaq. The average number of new 52-week highs increased substantially on both exchanges, rising to 102 on the NYSE and 96 on the Nasdaq. The number of new lows slightly decreased in the meantime, falling to 15 on the NYSE and 44 on the Nasdaq. The percentage of stocks above their 200-day moving average continued to increase, and the measure hit its highest level, above 65%, before closing the week near 64.5%.
Short interest fell significantly in the latter half of the week, as the most-shorted stocks outperformed thanks to the finalized trade agreement and the dovish stance of the Fed, with bears running for the exits in the bullish environment. While MiMedx (MDXG) pulled back in the first-half of the week, it quickly recovered, and since its short interest is still at 62%, the short-covering rally could soon resume. Snap-On (SNA) had another positive week, hitting its highest level since May, and while last year’s high is still far away for the stock, the broad rally on Wall Street could trigger a short squeeze, considering the stock’s very high days-to-cover (DTC) ratio of 18. Current GorillaPick, Hormel Foods (HRL) also remains a prime candidate for an epic short squeeze, since the stock got very close to its all-time high this week, with its DTC ratio still being above 17.
With the “phase-one” trade deal between the U.S. and China completed and the risk of a no-deal Brexit now being minuscule, the global economic weakness remains the only immediate danger to risk assets. Even though this week’s economic reports were mixed globally, U.S. growth remains strong. The rollback of the trade tariffs could also give a boost to the struggling Chinese economy and, in turn, the export-focused German economies as well. The U.S. and European services and manufacturing PMIs will kick next week off on Monday, while we will have building permits and housing starts coming out on Tuesday, with the Philly Fed Index being scheduled for Thursday. The week will end with the final reading of the third-quarter GDP and the core PCE Price Index, but as of right now, it seems unlikely that even the Fed’s favorite inflation measure could break the strong bullish trend on Wall Street. Stay tuned!
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