State of the Stock Market Analysis for the Week Ending on February 24th, 2019 (Narrow Range for Stocks 02-24-19)
This week, stocks traded in the narrowest range since the beginning of the deep correction in October on Wall Street, and the major indices closed just below their multi-month highs on Friday. This took place despite the fact that equities registered their worst day in two weeks on Thursday, declining by -0.5% on average, which perfectly illustrates the recent plunge in volatility. While the holiday-shortened week was low on key events, the trade talks with China resumed in Washington. With the March 1st deadline quickly approaching, investors were glad to hear that a final agreement is already taking shape, despite the recent mixed reports regarding the negotiations. While the latest earnings season is practically over, Walmart (WMT) provided a huge boost to the retail sector on Tuesday, beating estimates across the board, and confirming the healthy trend in the consumer economy.
We had a relatively quiet week with regard to economic releases, which may have contributed to the choppy price action in stocks. The minutes from the recent Fed meeting were at the center of attention, and although the FOMC members were slightly less-dovish-than-expected, stocks barely budged following the release. The manufacturing sector provided several negative surprises, with the Philly Fed Index falling by the most in eight years, the delayed December durable goods report missing across the board, and the Markit Manufacturing PMI also coming in well below consensus estimates. While existing home sales confirmed the continued weakness in the real estate market, the NAHB Housing Market Index gave bulls something to cheer about, as it came in well above forecast.
The technical picture improved further despite the sideways price action, as the major indices held on to most of their post-Christmas gains, while the key trend indicators all turned higher. The S&P 500, the Dow, and the Nasdaq are now all above their rising 200-day moving averages, while also being well above their rising 50-day moving averages. Small-caps continue to lead the way higher, and although the Russell 2000 just reached its 200-day moving average on Friday, it is clearly above its rising short-term indicator thanks to two months of relative strength. The Volatility Index (VIX) continued to decline due to the quiet days on Wall Street, as it closed below the 14 level on Friday for the first time since early October.
Market internals have confirmed the rally over the past two months, and after a brief period of weakness, the most reliable measures once again showed improvements this week. The Advance/Decline line hit fresh bull market highs for the second week in a row, as advancing issues outnumbered declining stocks by a 3-to-1 ratio on the NYSE, and by a 2-to-1 ratio on the Nasdaq. The average number of new 52-week highs increased substantially on both exchanges, rising to 118 on the NYSE and 102 on the Nasdaq. The number of new lows decreased in the meantime, falling to 6 on the NYSE and 14 on the Nasdaq. The percentage of stocks above their 200-day moving average continued to increase, and it got close to finally crossing the 50% mark, finishing the week at 49%; its highest level since August.
Short interest decreased further following the release of the minutes from the Fed’s latest meeting, and the bearish bets are at their lowest levels in almost six months. Accelerate Diagnostics (AXDX) had yet another blowout week, gaining more than 10% after publishing its quarterly report, and given its short interest of 56%, there could be more fuel left in the tank. Home furnishing company RH (RH) continues to edge higher toward its all-time high, and since the stock sports a short interest of 40%, bears might be in for a rough period. Fastenal (FAST) hit a new all-time high last week, and since the stock has a very high days-to-cover (DTC) ratio of 10, the breakout could be the start of an outright short squeeze.
The final week of February could turn out to be crucial for stocks and global risk assets in general, as the ‘trade truce’ with China will technically end on Friday. While, according to the rumors, the two sides are close to striking a deal, a final agreement would still likely be a positive surprise for most investors. Given the recent developments, an extension of the deadline is likely the worst-case scenario for bulls, but in any case, volatility could spike higher next week. As for economic releases, the CB Consumer Confidence number will be released on Tuesday together with the Case-Shiller Housing Price Index. Pending home sales are scheduled for Wednesday, and the Chicago PMI and the Advance GDP print will be released on Thursday. The week will also end with an eventful session, as the Core PCE Price Index, the ISM manufacturing PMI, and personal income will all be released on Friday, so investors should be prepared for a busy week on Wall Street. Stay tuned!
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