Commenting on Friday’s trading focusing on key economic data, Gorilla Trades strategist Ken Berman said:
Geopolitical uncertainty increased substantially in the wake of the unexpected airstrike. While especially energy markets could be in for a wild ride in the coming weeks, equity markets remained relatively stable on Friday. Compared to the low-volatility environment of the holiday period, traders had a rocky ride on Friday, with the turmoil in global risk-assets and the weak manufacturing PMI triggering the largest dip in stock in over a month, but the major indices still closed the week near their record highs.
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Key economic data is bearish
Stocks got hit hard in early trading on Friday due to the U.S. airstrike on Iran’s top military commander, but the major indices stabilized later and closed the ses71, or 0.8%, to 9,021, while the S&P 500 fell by 23, or 0.7%, to 3,235. Decliners outnumbered advancing issues by an almost 3-to-2 ratio on the NYSE, where volume was slightly above average.
We had a surprisingly eventful week on Wall Street, despite the light trading activity leading up to New Year's Eve, as Thursday’s unexpected Chinese monetary stimulus and Friday’s geopolitical escalation caused wild swings across asset classes. The major indices were little changed even in the wake of the late-week volatility, and although analysts warned of a possibly severe retaliation from the Persian country, stocks barely budged in the face of the increased risk of a military conflict. Safe-haven assets, on the other hand, experienced strong inflows, with gold hitting its highest level since September, while the price of oil also hit a new multi-month high.
The key economic releases leaned slightly bearish this week, even as the trade deficit shrank considerably and the Chicago PMI beat the consensus estimate together with construction spending. The ISM manufacturing PMI showed contraction for the fifth month in a row, reinforcing the fears of a recession in the struggling sector. The CB consumer confidence number also missed expectations in December, despite the encouraging early holiday sales reports, while the Housing Price Index disappointed investors as well. The Challenger job cuts estimate confirmed the robust job market trends, and the weekly number of new jobless claims remained low too following its recent spike.
Technical outlook
The technical picture remained bullish across the board despite the recent pullback with the key trend indicators still pointing higher. The S&P 500, the Nasdaq, and the Dow are well above their rising 200-day moving averages, and the benchmarks also remain above their steeply rising 50-day moving averages. Small-caps lagged the broader market throughout the week, but even though eh Russell 2000 hit its lowest level in almost three weeks on Friday, the index still closed the week well above both of its moving averages on Friday. The Volatility Index (VIX) spiked above the 15 level on three out of four sessions this week, hitting a three-week high on Friday, but it closed the week only modestly higher near 14.
Market internals remained upbeat in the face of the weakness among small-caps, and although a couple of the most reliable measures continue to show negative divergences, the overall picture is clearly bullish. The Advance/Decline line continued to hit new bull market highs, as advancing issues outnumbered decliners by a 5-to-4 ratio on the NYSE, and by a 4-to-3 ratio on the Nasdaq. The average number of new 52-week highs fell on both exchanges, declining to 78 on the NYSE and 79 on the Nasdaq. The number of new lows also decreased, falling to 6 on the NYSE and 20 on the Nasdaq. The percentage of stocks above the 200-day moving average remains high compared to last year’s average, and the indicator’s closing value of 69% confirms the healthy bull market.
Key economic could take a backseat to Iran
Short interest continues to be close historic lows on Wall Street, even though the most-shorted issues slightly lagged the broader market this week. Although our previous pick, MiMedx (MDXG) sold off on the first two sessions of 2020, it remains in a bullish technical pattern, and given the stocks very high short interest of 61%, bears could fuel another breakout in the coming weeks. Match Group (MTCH) also looks ready to add to its recent gains, as the stock remained stable even during Friday’s turmoil and its short interest is still at 58%. Zion Bancorp (ZION) has been flirting with its one-year high for several weeks now, and although Thursday’s breakout attempt failed due to the geopolitical tensions the stocks days-to-cover (DTC) ratio of 14 is encouraging for bulls.
Even without the escalating geopolitical tensions, investors would likely be in for a very busy week, due to the key economic releases. The ISM non-manufacturing PMI and factory orders will highlight Tuesday’s session, and in light of the weak manufacturing PMI, traders will likely put even more weight on the services measure. The ADP payrolls number will come out on Wednesday, while the government jobs report will be out on Friday, as usual. Even though an outright war remains unlikely with Iran, according to most analysts, Friday’s airstrike will likely lead to some kind of retaliation. All eyes will be on the price of crude oil, as the Persian state might use the ‘oil weapon’ to inflict the maximum damage. Stay tuned!
