Commenting on today’s trading Gorilla Trades strategist Ken Berman said:
Even though stocks finished well below their intraday highs on Friday, the trade deal, together with the positive change in market internals could be the basis of a durable rally on Wall Street. Tech stocks and small-caps led the way higher on Friday, confirming the risk-on shift, and while stocks sold off following the President’s late-day announcement, the agreement might be a game-changer for the coming months.”
Q3 2019 hedge fund letters, conferences and more
The major indices closed the week with a three-day winning streak, as Friday’s high-level trade talks were concluded by a partial trade deal with China. The Dow gained 320 or 1.2%, to 26,817, the Nasdaq was up 106, or 1.3%, to 8,057, while the S&P 500 rose by 32, or 1.1%, to 2,970. Advancing issues outnumbered decliners by an almost 8-to-1 ratio on the NYSE, where volume was well above average.
Stocks, together with Treasuries and currencies, had another wild week, as the Brexit saga and the trade talks between the U.S. and China provided plenty of contradicting headlines. The roller coaster ride ended on a positive note, thanks to the partial deal that was struck on Friday, but the major indices are still shy of their all-time highs. The Brexit talks took a sudden positive turn Thursday too, and while investors were already bracing themselves for a hard Brexit, it seems that the European Union (EU), the U.K., and Ireland might reach a deal on the disputed border issues after all. Bulls were also happy to see that tech stocks finally flexed their muscles ahead of the weekend, which could mean that the risk-on shift will be sustained this time around.
Inflation was at the center of attention this week, as far as economic releases are concerned, and both the Producer Price Index (PPI) and the Consumer Price Index (CPI) missed expectations in September. The easing price pressures confirm the weakening activity in manufacturing, but the consumer economy continues to show strength, despite the few weaker-than-expected releases in recent weeks. The Michigan consumer sentiment number beat expectations, just like the IBD/TIPP Sentiment Index, but the NFIB Small Business Index and the JOLTS job openings estimate were both below the consensus estimate. Despite the mixed releases, Treasury yields pushed higher across the curve, as the positive trade- and Brexit-related developments boosted investor sentiment.
The technical picture improved significantly thanks to the rally in the second half of the week, and the major indices are now in bullish trends on all time-frames again. The S&P 500, the Nasdaq, and the Dow are still well above their rising 200-day moving averages, and the benchmarks also surged back above their declining 50-day moving averages on Friday. While small-caps remained relatively weak until Friday, the Russell 2000 performed well on the last day of the week, pushing back above its declining 50-day moving average. The Volatility Index (VIX) spiked above 20 yet again this week, but it plunged below the 16 level amid the strong rally in stocks, hitting a two-week low and closing near 15.5 on Friday.
Market internals were boosted by the late-week rally, and especially Friday’s blowout session, but some of the key measures remain slightly weaker than a few weeks ago. The Advance/Decline line quickly recovered from its recent dip, and it closed the week at a new bull market high, as advancing issues outnumbered decliners by a 3-to-1 ratio on the NYSE, and by a 4-to-1 ratio on the Nasdaq. The average number of new 52-week highs remained low on both exchanges, edging higher to 46 on the NYSE and 19 on the Nasdaq. The number of new lows declined in the meantime, dropping to 46 on the NYSE and 94 on the Nasdaq. The percentage of stocks above the 200-day moving average bounced back above the 50% level again, and the indicator closed the week near 52%
Short interest increased in the first half of the week, but investors removed a large part of their bearish bets, later on, fueling an epic rally in the most-shorted issues. Our previous pick, National Beverage (FIZZ) continues to show encouraging signs, and the stock hit a five-month high on Friday, with the help of its short interest of 54%. Battered home furnishing chain, Bed Bath & Beyond (BBY) also had a great week, rising by almost 30%, and the stock also has a short interest of 55%, which could mean that a short squeeze is ahead. risks for bears. Microchip Technology (MCHP) might be ready to break out of its bullish consolidation pattern, and given its very high days-to-cover (DTC) ratio of 16, the stock might soon hit a new all-time high.
While the President’s announcement regarding a ‘phase one’ deal with China caused a pullback in the major indices, the aftermath of the partial agreement could still be a positive period for stocks. Investors will be closely watching how the U.S.-Chinese relations evolve in the wake of the deal, but there will also be key economic releases to digest. All eyes will be on the retail sales report on Wednesday, as it will likely have a major impact on rate cut expectations, while Thursday’s Philly Fed Index and industrial production might also cause wild swings in stocks and Treasuries. The Brexit negotiations will stay in focus as well, and with the October 31 deadline being only three weeks away, British assets could remain highly volatile. Stay tuned!
