State of the Stock Market Analysis for the Week Ending on September 30th, 2018 (Wall Street’s Best Quarter in 5 Years 9-30-18)

All You Need Is Jobs

Investors had a highly unusual week with regard to volume and volatility due to the Fed’s rate decision. The major indices finished mixed for the second week in a row, with only the Nasdaq closing in the green. The Dow and the S&P 500 further retreated from their recent all-time highs, but the tech benchmark got close to hitting its record high following the Fed’s rate hike. Despite the mixed price action and the strong international headwinds, Wall Street recorded its best quarter in 5 years, as the major indices recovered from the deep correction that started in February. Apart from Friday’s selloff in Europe, global stocks rose in a concerted fashion last week, which could be the precursor to another strong year-end for investors.


While all eyes were on Jerome Powell and the Fed last week, several key economic releases also came out, and the overall picture was slightly negative. As expected, the Central Bank delivered its third rate hike of the year, with a slight dovish shift in the monetary statement. However, since Mr. Powell warned of overvaluation in some assets, stocks had a rough post-Fed ride. Before the FOMC meeting on Wednesday, the CB Consumer Confidence rocketed higher unexpectedly. However, core durable goods orders and the Chicago PMI both came in below expectations, while the final GDP print and personal spending matched the consensus estimates, with the core PCE Price Index showing lower than expected inflation.


The technical picture improved thanks to the Nasdaq’s relative strength, and now the major indices are all well above their 50-day moving averages. The Dow, the S&P 500, and the Nasdaq are also well above their 200-day moving averages, despite the divergent trends of the recent weeks. The relatively weak Russell 2000 closed just below its 50-day moving average on Friday. However, the small-cap index is still far north of its long-term indicator, but barring a quick reversal, the short-term trend has the potential to turn bearish. On a positive note, the Volatility Index (VIX) drifted sideways throughout the week, as it remained below the 13 level even before the Fed’s rate decision, closing the week unchanged near 12.


Market internals continued to show weakness under-the-hood, with the most reliable measures all deteriorating amid the mixed price action. The Advance/Decline line drifted lower all week, despite the recent new highs from the Dow and the S&P 500, even as advancing issues outnumbered declining stocks by a 2-to-1 ratio on the NYSE, and by a 3-to-1 ratio on the Nasdaq. The average number of new 52-week highs continued to decline on both exchanges, falling to 58 on the NYSE and 71 on the Nasdaq. The number of new lows ticked higher in the meantime, rising to 120 on the NYSE and 81 on the Nasdaq. The percentage of stocks above their 200-day moving average fell below 50% again, due to the weakness in small-caps, which adds to the short-term worries regarding the breadth of the rally.


The most-shorted issues performed in-line with the broader market last week, with plenty of outstanding performances among the most-hated names, thanks to the general risk-on sentiment. Duluth Holdings (DLTH) might have ended the correction that started in September, and after an encouraging 5% weekly gain, bulls might be able to capitalize on the stock’s short interest of 42% again. INSYS (INSY) also sports a short interest of 33%, and the stock might be ready to tackle its August highs after the deep correction. Diamond Offshore (DO) received a lift from the rising price of oil and natural gas in September, and with a days-to-cover (DTC) ratio of 17, the stock could be ready for more gains.


While we will only have a few important economic releases coming out this week, all of them could have a major impact on the stock market. The ISM manufacturing and non-manufacturing PMIs are scheduled for Monday and Wednesday, respectively, and the government jobs report will come out on Friday as usual. Last month, the accelerating pace of wage growth stole the show, sparking a surge in Treasury yields, and now analysts expect a slightly lower 0.3% monthly gain, with a 185,000 rise in payrolls, and a downtick to 3.8% in the unemployment rate. Politics will likely take center stage again, as analysts expect a progressively intensifying campaign before the mid-terms in early November. This, along with the still suspiciously weak emerging markets, pose the biggest threat to the advancing trend on Wall Street. That said, if the Nasdaq remains relatively strong, it will likely be hard to stop the bullish juggernaut. Stay tuned!


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