State of the Stock Market Analysis for the Week Ending on February 3rd, 2019 (The Busiest Week on Wall Street 02-03-19)
We had the busiest week of the year, so far, on Wall Street, with the Fed’s monetary meeting, a slew of key earnings reports, and several crucial economic indicators providing catalysts throughout the week. The trade talks with China also continued, still without any tangible results, while the Brexit saga entered its next phase, with only two months until the final deadline for a deal. The most important quarterly earnings were mixed, but the numbers confirmed the divergence between the overseas and the domestic economies that the indicators have been showing for months now. The major indices finished higher yet again in the face of the mixed news flow, and after two weeks of sideways price action, all of the benchmarks hit new 6-week highs following the Fed’s dovish monetary statement.
While we are still missing a few key economic reports due to the government shutdown, like the retail sales and durable goods reports, the week once again proved that domestic growth is on track. That said, the CB Consumer Confidence number fell significantly on the heels of the year-end turmoil in financial markets, and several worrisome indicators came out regarding the Chinese and European economies. The ISM manufacturing PMI bounced back strongly following last month’s disappointing reading, defying the global trends in the sector, while non-farm payrolls surged higher once again, even as the unemployment rate also ticked higher unexpectedly. The housing market sent mixed signals, and although new home sales were solid, the Case-Shiller index and pending home sales missed expectations in January.
The technical picture continues to slowly improve in the aftermath of the deepest correction in years, and although bulls still cannot celebrate victory, the bull market is in no danger at this point. The major indices are now clearly above their flat 50-day moving averages thanks to the late-week rally, but the Nasdaq and the S&P 500 are still below their 200-day moving averages, while the Dow closed right at its long-term indicator. Although the Russell 2000 lost some of its relative strength, and the small-cap benchmark is still well below its long-term moving average, it is now significantly above its short-term indicator. The Volatility Index (VIX) is also at its lowest level since early-December, finishing the week just above 16.5, and although it’s far away from its pre-correction range, the trend confirms the improving investor sentiment.
Even though market internals haven’t improved as rapidly as in the first weeks of the year, the most reliable measures are getting closer and closer to their normal bull market levels, thanks to the broad-based rally. The Advance/Decline continued to hit new multi-month highs, as advancing issues outnumbered declining stocks by a 5-to-1 ratio on the NYSE, and by a 4-to-1 ratio on the Nasdaq. The average number of new 52-week highs increased substantially on both exchanges, rising to 76 on the NYSE and 45 on the Nasdaq. The number of new lows declined in the meantime, falling to 14 on the NYSE and 26 on the Nasdaq. The percentage of stocks above the 200-day moving average continued to rise, as it closed at 33% on Friday, its highest level since November.
The most-shorted issues continued their exceptional year, and thanks to improving investor sentiment, short interest declined even further from the already low levels of the recent weeks. Diversified REIT Seritage Growth (SRG) hit a fresh 3-month high on Friday in the face of the mixed housing indicators, and given its short interest of 38%, the stock could continue its explosive short-covering rally. Omnicon Group (OMC) continues to flirt with the $80 per share price level, and although it’s still stuck below this technical ‘resistance,’ its days-to-cover (DTC) ratio of 11 could mean that a breakout may be ahead. Snap-On (SNA) also sports a DTC ratio of 11, despite the recent short-covering rally, and after gaining more than 20% since the Christmas panic, the stock could now be headed toward its all-time high.
We will have a relatively quiet week on Wall Street following the recent crazy schedule, but earnings season will continue, and some of the delayed economic reports could also shake up markets. The highly-anticipated ISM non-manufacturing PMI is scheduled for Tuesday release, factory orders will be out on Monday, while the trade balance will highlight Wednesday’s session. Following the dovish shift by the Fed, the European Central Bank and the Bank of Japan, stocks might also get a boost from the Bank of England on Thursday, especially given the continued uncertainty regarding the Brexit process. Google parent Alphabet (GOOG), Disney (DIS), and Philip Morris (PM) will be the most important companies to report earnings, but chipmaker NVIDA (NVDA) and biotech giant Gilead (GILD) could also make waves next week. Stay tuned!
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