State of the Stock Market Analysis for the Week Ending on October 14th, 2018 (Stocks Have Most Volatile Week Since Mini-Crash 10-14-18)


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Treasury yields were at the center of attention over the past week, as investors nervously watched the multi-year highs in interest rates across the curve, which already caused a dip in the major indices during the previous week. While yields actually finished the week lower, stocks had their most volatile week since the February mini-crash, losing over 5% on average. The Nasdaq was the most volatile benchmark yet again, hitting its lowest level in 4 months, but the Dow and S&P 500 also turned sharply lower following an extended period of relative strength. Although several rally attempts failed during the week, Friday’s session was positive, and the late strength we witnessed could be a good sign for the upcoming week.


Two crucial inflationary measures were released last week, the Producer and Consumer Price Indices (PPI and CPI) , and investors paid even more attention than usual, given the historic surge in yields. The PPI report didn’t provide any major surprises, with both the headline and the core measure coming in at 0.2%, as expected. However, consumer prices missed the consensus estimate for the second month in a row. This miss contributed to the bounce in Treasuries, but it wasn’t enough to turn the tide in the stock market. The Michigan Consumer Confidence report also came in slightly below expectations, but it remained very close to its recent near-record levels, so there are still healthy trends in the consumer economy.


While we noted the divergences in the technical picture in recent weeks, which are often precursors of a deeper correction, the pace of last week’s decline was probably surprising to everyone. The major indices all fell well below their 50-day moving averages, which already turned south in the case of the Nasdaq and the S&P 500. While the short-term trend is now bearish, the long-term advance is not in danger, with the 200-day moving averages still being on rising trajectories. The Volatility Index (VIX) more than doubled in two weeks, and it closed near 21, its highest level since March.


Not surprisingly, market internals remained weak, although some of the short-term measures reached extreme readings toward the end of the week, possibly pointing to an impending market bottom. The Advance/Decline continued to hit multi-month lows together with the major indices, as declining issues outnumbered advancing stocks, by a 7-to-1 ratio on the NYSE, and by an 8-to-1 ratio on the Nasdaq. The average number of new 52-week highs declined for the fourth week in a row, dropping to 26 on the NYSE and 19 on the Nasdaq. The number of new lows rose substantially, climbing to 395 on the NYSE and 268 on the Nasdaq. The percentage of stocks above their 200-day moving average took a nosedive amid the broad selloff, and it hit its lowest level since February at 26% on Friday!


Some of the most-shorted issues remained stable despite the worst week for stocks in months, even as short interest shot higher on Wall Street. Gogo Inc. (GOGO) drifted sideways throughout the week, withstanding the selling pressure, and with its short interest at 62%, the stock could be getting ready for a short squeeze. Battered cosmetics firm Revlon (REV) managed to rise by almost 20% in one week, and the stock still has a short interest of 38%, which could provide fuel for further gains. Although current GorillaPick, Hormel Foods (HRL), declined together with the broader market, given its days-to-cover (DTC) ratio of 15, the rally that started in August could resume soon.


Heavy trading is expected following the recent volatile days, and the week will start with a bang in regard to economic releases as well. The retail sales report will be coming out before the market opens on Monday. Analysts expect robust growth in sales, and a positive surprise could help the gloomy sentiment on Wall Street. The minutes from the recent Fed meeting will be released on Wednesday, together with building permits and housing starts, while the Philly Fed Index will come out on Thursday. While we had a rocky ride last week, bulls hope the fact that stocks finished near their highs on Friday means that buyers are back in control, and that the bull market will carry on. Stay tuned!


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