State of the Stock Market Analysis for the Week Ending on November 4th, 2018 (A Potential Year-End Rally for the Bulls? 11-4-18)
Stocks scored their first bullish week since late September, despite the pullback on Friday, when rising Treasury yields began to worry investors again. While volatility remains elevated on Wall Street ahead of next week’s mid-term elections, and the major indices are all well below their all-time highs, the current bounce has the potential to morph into the year-end rally that bulls are so eagerly awaiting. While the quarterly numbers of some of the biggest names disappointed last week, especially with regard to the outlook for next quarter, we still likely concluded another record-breaking quarter, based on the reports from more than 90% of companies.
We had a very busy week regarding economic releases, and the majority of the key indicators confirmed the robust growth, with the labor market providing the most significant confidence boost for bulls. The headline payrolls number blew past expectations, and as wages continue to increase at a rapid rate too, the consumer economy will likely remain strong. It’s no surprise that the CB consumer sentiment also beat consensus estimates, even though the housing market continued to suffer amid rapidly rising mortgage rates. The ISM manufacturing PMI was worse-than-expected in September, but the 57.7 reading still points to a healthy expansion in the sector, underlined also by the positive surprise in factory orders.
The technical picture remains mixed, despite the first three-day winning streak in stocks in over a month, and the short-term trend continues to be negative on the level of the major indices. The Nasdaq and the S&P 500 are still below their respective 50-day and 200-day moving averages, while the Dow closed the week right at its long-term indicator. Although the Russell 2000 outperformed the broader market, small-caps continue to be in the worst shape from a technical perspective, with the index being well below both its declining 50-day and 200-day moving averages. The Volatility Index (VIX) declined substantially after spiking as high as 28 on Monday, as the fear-gauge closed the week below the “line-in-the-sand” 20 level.
Market internals improved significantly thanks to the broad-based rally, and although the effects of the deep correction are still apparent, the most reliable measures all ticked higher last week. The Advance/Decline line hit its highest level since early October on Thursday, as advancing issues outnumbered declining stocks, by a 4-to-1 ratio on the NYSE, and by a 5-to-1 ratio on the Nasdaq. The average number of new 52-week highs bounced back on both exchanges, rising to 25 on the NYSE and 30 on the Nasdaq. At the same time, the number of new lows halved, falling to 231 on the NYSE and 216 on the Nasdaq. The percentage of stocks above their 200-day moving average hit a one-month high above the 30% level, before closing the week somewhat lower. However, the measure continues to show a positive divergence.
Wall Street saw one of the strongest short squeezes in years last week, which was triggered by the possibility of a trade deal with China and better-than-expected economic numbers. So, there were plenty of great performances among the most-shorted issues. Auto dealership, Carvana (CVNA), gained almost 30% in a week, after two months of steep losses, and given its short interest of 42%, Carvana’s next target could be its September high. Mattel (MAT) also jumped more than 10% last week, and sporting a days-to-cover ratio (DTC) of 15, it could lead to a sharp rally in the coming weeks. Omnicon (OMC) recovered well from its late-October plunge, and since it still has a DTC ratio of 12, it could also resume its advancing trend soon.
The first half of the upcoming week will be highlighted by the elections on Tuesday, and based on the latest polls and prediction markets, the Democratic party will likely take control of the House, with the GOP adding to its majority in the Senate. The ISM non-manufacturing PMI will be out on Monday, while the Fed’s rate decision is scheduled for Thursday. The busy will week will end with the PPI Index and the Michigan Consumer Sentiment report. Investors should also pay close attention to the U.S.-Chinese relations since it’s possible that President Trump may be more inclined to strike a deal after the midterms. In any case, given the stable fundamental backdrop, it wouldn’t be surprising to see a strong post-election rally, especially following more than a month of corrective price action. Stay tuned!
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