State of the Stock Market Analysis for the Week Ending on December 9th, 2018 (Wild Swings for December Last Week 12-16-18)
Financial markets remained unusually volatile for a December last week, with stocks, bonds, and currencies all experiencing wild swings amid the nervous environment. Equities had a mixed week, with a decisively bearish ending, as the major indices fell sharply on Friday, despite being in the green for most of the week. While the Nasdaq finished virtually unchanged, the Dow and the S&P 500 closed clearly in the red. And on a negative note, the Russell 2000 hit its lowest level since February, as small-caps were relatively weak as well. Political and economic troubles in Europe and the slowing growth in China were behind the late-week dip, although the threat of a government shutdown also weighed on investor sentiment, even though domestic fundamentals remain solid.
The most important economic releases all confirmed the healthy domestic trends, with especially the retail sales report making bulls smile on Friday. Sales came in at 0.2%, slightly above the consensus estimate of 0.1%. Additionally, last month’s already very strong figure was revised from 0.7%, to 1.1%, which is a great sign for the retail sector ahead of the holiday season. The less volatile core measure was also revised higher for October, while its November reading was in-line with expectations, and the higher-than-expected Producer Price Index (PPI) pointed to demand-side pressures in the economy too. Industrial production was also higher-than-expected, and new jobless claims fell back to 206,000. So, although the price action in the stock market is still mixed, at best, there is no recession in sight at this point.
The technical picture remained negative on Wall Street, with especially the short-term indicators being worryingly weak. The bullish long-term trend is still not in danger, but the major indices continue to be well below their declining 50-day moving averages. The Nasdaq, the S&P 500, and the still relatively strong Dow are also below their 200-day moving averages following the hectic week, but the benchmarks are still above their October lows. The Russell 2000 is below both its 50 and 200-day moving averages as well, and since small-caps continue to show weakness compared to the broader market, the benchmark hit new correction lows again. Although the Volatility Index (VIX) drifted lower until Friday, it jumped higher during Friday’s dip, and finished the week near the 22 level.
Market internals continued to deteriorate, due to the relative weakness in small-caps, and the most reliable measures are still confirming the bearish price action. The Advance/Decline line plunged to a new correction low, as declining issues outnumbered advancing stocks by a 4-to-1 ratio on the NYSE, and by a 2-to-1 ratio on the Nasdaq. The average number of new 52-week highs declined on both exchanges, falling to 25 on the NYSE and 16 on the Nasdaq. The average number of new lows remained high, rising to 390 on the NYSE and 367 on the Nasdaq. The percentage of stocks above their 200-day moving average fell below 20% for the first time since the mini-crash in February, closing the week at 19%, and still pointing to broad-based weakness in the stock market.
Short interest ticked higher following a stable period, but from a historical perspective, it’s still low thanks to the longest bull market in history. While the most heavily shorted stocks performed worse than the broader market on average, Revlon (REV) managed to drift higher in the hostile environment, and given its short interest of 43%, the stock has the potential to continue to outperform. Match Group (MTCH) also defied the negative trend, rising by almost 10% in a week, and it still has a short interest of 42% to support further gains. Sempra Energy (SRE) is near the top of the list of the stocks with the highest DTC ratios, with a reading of 12.
The last full trading week of the year will be packed with crucial events, and the Fed’s scheduled rate decision on Wednesday will likely have the biggest impact on financial markets. While rate hike odds have declined sharply in the last couple of months as Treasury yields declined substantially, analysts still expect another tightening move. Before that, the housing market will be in focus on Tuesday, with housing starts and building permits being released, while the durable goods report and the final GDP print will highlight Friday’s session. Besides the economic releases, the Brexit saga, the ongoing trade talks with China, and the threat of a government shutdown could be the defining topics of the week, but bulls will be hoping for the market to finally settle down to put them back in control on Wall Street. Stay tuned!
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