State of the Stock Market Analysis for the Week Ending on January 6th, 2019 (Twists and Turns in 2019 01-06-19)
Despite the fact that we had a holiday-shortened week, we saw a lot of twists and turns in just the first three trading days of 2019. Investor sentiment reached panicky levels due to the worst December for equities since the Great Depression, but the strong year-end bounce could have possibly set the stage for an unusually bullish January. Apple’s (AAPL) profit warning was the most negative event of the week, as the tech giant confirmed the serious economic slowdown in China and dragged the whole market lower with its 10% decline. Despite the Apple-induced dip, stocks quickly recovered, and a vast majority of stocks closed the week in the green thanks to the broad-based short squeeze on Friday.
Treasury yields also experienced a roller-coaster ride, as economic numbers were mixed during the first week of the year, with major positive and negative surprises in the key indicators. The ISM manufacturing PMI came in at 54.1, well below the consensus estimate of 57.3, following the lead of the dismal global readings in the sector. Although it is too early to say that the global slowdown is finally affecting the domestic economy, investors should keep an eye on industrial production in the coming months. The labor market, on the other hand, is still very strong, and payrolls grew by 312,000 in December, blowing away analysts’ expectations. Hourly earnings increased 0.4% on a monthly basis, and the yearly wage growth of 3.2% is the strongest since 2009.
The technical picture continues to be negative on Wall Street, despite the recent bounce, as the short-term trend indicators are still confirming the bearish setup. That said, from a long-term perspective, we are still in a bull market, even though the major indices are all well below their declining 50-day moving averages. The Nasdaq, the S&P 500, and the Dow are also below their declining 200-day moving averages, similarly to the Russell 2000, although small-caps finally showed relative strength this week following a long period of weakness. The Volatility Index (VIX) also had an eventful week, and due to the recovery in stocks, it hit an almost three-week low on Friday, finishing just above 21 before the weekend break.
Market internals improved significantly thanks to the broad-based advance, and despite the volatile price action in the major indices, the most reliable measures are still far from being comfortably bullish. The Advance/Decline line hit its highest level in three weeks on Friday, as advancing issues outnumbered declining stocks by a 4-to-1 ratio on the NYSE, and by a 3-to-1 ratio on the Nasdaq. The average number of new 52-week highs remained very low on both exchanges, ticking higher to 8 on the NYSE and 11 on the Nasdaq. The number of new lows collapsed thanks to the rally, falling to 45 on the NYSE and 65 on the Nasdaq. The percentage of stocks above their 200-day moving average rose somewhat, closing the week near 17%, but that is still a very low reading by bull market standards, reflecting the deep correction of the past three months.
Short interest declined substantially as a result of the recent short squeeze, and even though the major indices are down about 15% from their all-time highs, short interest remains very low, even in the weakest sectors. Revlon (REV) gained 20% over the past two weeks, and since its short interest is still at 41%, the stock may just be ready to tackle its November high. While toymaker Mattel (MAT) had an ugly December, the stock staged an impressive rebound on Friday, and given its days-to-cover (DTC) ratio of 12, a strong recovery could be ahead. Snap-On (SNA) also sports a high DTC ratio of 10, and while the stock dropped below its key $140 support level during the December rout, a lot of bears may start to catch cold feet should the rally of the past two weeks continue.
The busy January will likely continue next week on Wall Street, with several key economic releases scheduled. The Fed and Chairman Jerome Powell will be the focus once again. We will have the ISM non-manufacturing PMI on Monday, the Fed’s meeting minutes on Wednesday, and the Consumer Price Index (CPI) coming out on Friday. Mr. Powell will give another speech on Thursday, and with the VIX still being above the widely-watched 20 level, it is safe to say that traders will likely be in for wild price swings again, in both the stock and bond markets. While the Fed Chair did strike a more dovish tone on Friday, the meeting minutes might confirm that the Central Bank is still planning on raising interest rates in the coming months. We may not be entirely out of the woods just yet, so keep your seat belts fastened and be prepared for anything. Stay tuned!
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