April 13, 2019

We had a two-faced week in financial markets. Although there were plenty of both positive and negative catalysts, which had the potential to cause large moves, we had one of the calmest weeks of the year on Wall Street. While stocks drifted sideways for most of the week, the major indices still finished higher, apart from the Dow, with the S&P 500 gaining ground for the third straight week. The most important news of the week was that the UK avoided a no-deal Brexit, although the country is likely in for more chaos until the new deadline at the end of October. The Fed and the European Central Bank (ECB) all but assured investors that they will not have to face more rate hikes this year. And on another positive note, earnings season kicked off with better-than-expected numbers from JP Morgan and Wells Fargo.

Inflation and central banks have been in focus this week with regard to the economy, and even though the key indicators continued to show a mixed picture

We had a two-faced week in financial markets. Although there were plenty of both positive and negative catalysts, which had the potential to cause large moves, we had one of the calmest weeks of the year on Wall Street. While stocks drifted sideways for most of the week, the major indices still finished higher, apart from the Dow, with the S&P 500 gaining ground for the third straight week. The most important news of the week was that the UK avoided a no-deal Brexit, although the country is likely in for more chaos until the new deadline at the end of October. The Fed and the European Central Bank (ECB) all but assured investors that they will not have to face more rate hikes this year. And on another positive note, earnings season kicked off with better-than-expected numbers from JP Morgan and Wells Fargo.

Inflation and central banks have been in focus this week with regard to the economy, and even though the key indicators continued to show a mixed picture, prices are pointing in the same direction across the economy. The Consumer Price Index (CPI), the Producer Price Index (PPI), and import prices were all higher-than-expected in March, with rising energy costs being behind the bulk of the increases. New jobless claims are near their all-time lows, which confirms the robust labor market conditions, but that could also increase inflationary pressures down the road. Due to price pressure, Treasury yields finished notably higher this week, especially the short-end of the curve, which pushed higher, increasing the pressure on the Fed, even in light of the dovish surprise from the ECB’s monetary meeting.

The technical picture continues to be clearly bullish, and despite the mixed week for the major indices, all of the key trend indicators are positive, even for the lagging Dow. The Dow, the S&P 500, and the Nasdaq are all above their rising 200-day moving averages, while also being well north of their steeply rising 50-day moving averages, edging ever closer to their all-time highs. Following two strong weeks, small-caps performed slightly worse than the broader market. The Russell 2000 is still in a weaker technical position compared to the key benchmarks, although it closed above both its short and long-term moving averages. The Volatility Index (VIX) hit a fresh six-month low on Friday, finishing the week near the 12 level again, confirming the strong bullish trend in stocks.

Market internals remained solid despite the slight weakness in small-caps this week, as the most reliable measures are still in-line with a healthy bull market. The Advance/Decline line continued to march higher, hitting yet another all-time high on Friday, 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 edged lower on both exchanges, dropping to 109 on the NYSE and 85 on the Nasdaq. The number of new lows rose slightly in the meantime, increasing to 16 on the NYSE and 39 on the Nasdaq. The percentage of stocks above their 200-day moving average increased yet again, and the indicator hit 58% on Friday; its highest level since October.

Short interest continued to decline due to the decreasing volatility and the Brexit relief, and with no immediate risks on the horizon, the total amount of bearish bets could fall even further. Carvana (CVNA) had a blowout week, gaining more than 10%, hitting a seven-month high, and since it still has a short interest of 63%, the rally could easily continue. Following two negative weeks, Accelerate Diagnostics (AXDX) staged a recovery in the second half of the week and given its short interest of 49%, a strong bullish move could be ahead for the stock. Microchip Technology (MCHP) surged to a new eight-month high on Friday, and since it has a very high days-to-cover (DTC) ratio of 14, the stock could be in for a short squeeze in the coming weeks.

Next week, we will get important economic releases every day, so all eyes will be on the Treasury market, especially if the most critical indicators confirm the ongoing economic expansion. The Empire State Manufacturing Index will highlight Monday’s session, industrial production will be released on Tuesday, while the trade balance and the Fed’s beige book will be out on Wednesday. Thursday could see the biggest moves in stocks due to the release of the retail sales report and the Philly Fed Index, while the housing market will be in focus on Friday, as both building permits and housing starts will come out. However, keep in mind that the stock market will be closed next Friday. While the busiest weeks of the earnings season are still ahead, Bank of America (BAC), Citigroup (C), PepsiCo (PEP), Netflix (NFLX), and IBM (IBM) will all publish their quarterly numbers next week, so traders will likely have another busy week on their hands. Stay tuned!