Rate cuts the main factor behind the broad rally in equities

Commenting on today’s broad rally in equities Gorilla Trades strategist Ken Berman said:

broad rally in equities

Tumisu / Pixabay

With the Nasdaq and small-caps leading the way higher on Friday, there is no doubt about the underlying strength behind the rally in stocks, so we could be in for a record-setting November. As one trader explained, “Friday’s session had all the trademarks of a bull market, since the ‘riskier’ sectors spearheaded the advance, volatility collapsed, and stocks finished the day near their intraday highs ahead of the weekend break.”

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The major indices all finished significantly higher on Friday, thanks to the optimistic reports regarding the trade talks with China, the positive non-farm payrolls number, and another batch of bullish earnings. The Dow gained 301 or 1.0%, to 27,347, the Nasdaq was up 94, or 1.1%, to 8,386, while the S&P 500 rose by 29, or 1.0%, to 3,067. Advancing issues outnumbered decliners by an almost 3-to-1 ratio on the NYSE, where volume was slightly above average.

Stocks had a clearly positive week on Wall Street with the Nasdaq and the S&P 500 both hitting new all-time highs, and the lagging Dow also getting close to its respective record high. The overwhelmingly bullish quarterly earnings and the Fed’s third rate cut in a row were the main factors behind the broad rally in equities that carried most of the key sectors higher despite the usual day-to-day volatility of the earnings season. The fact that the European Union (EU) granted another extension to the Brexit deadline also boosted global risk assets, and now the December elections will be the next major event in the never-ending saga.

We had a very busy week of economic releases, and despite the broad rally in equities, most of the key forward-looking reports actually missed the consensus estimates. The CB consumer confidence number failed to rebound following, last month’s plunge, while the Core PCE Price Index and personal spending also hinted on the cooling of the consumer economy. As for manufacturing, the Chicago PMI and the ISM manufacturing PMI both missed expectations, with especially the former measure confirming the contraction in the globally weak sector. On a positive note, the first reading of the third quarter GDO was much better-than-expected, and the government jobs report was also solid, with especially the NFP number making bulls smile.

Technicals

The technical picture remains positive across the board, and even the relatively weaker Dow is now in a clearly rising short-term trend, getting very close to its all-time high on Friday. The S&P 500, the Nasdaq, and the Dow are still well above their rising 200-day moving averages, and the benchmarks also closed the week far above their rising 50-day moving averages on Friday. Despite a weaker patch around Wednesday’s Fed meeting small-caps had another bullish week, and thanks to Friday’s surge, the Russell 2000 got very close to its more than one-year high. The Volatility Index (VIX) had an active week, but despite spike higher on Thursday, the ‘fear-index’ closed the week near 12.3, its lowest level since late-July.

Market internals continued to improve, reflecting the ‘under-the-hood’ strength that has been apparent for several weeks now, and the most reliable measures continue to support the rally. The Advance/Decline line hit new bull market highs one again, as advancing issues outnumbered decliners 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 increased again on both exchanges, rising to 109 on the NYSE and 88 on the Nasdaq. The number of new lows also edged higher in the meantime, rising to 32 on the NYSE and 54 on the Nasdaq. The percentage of stocks above the 200-day moving average continued to increase thanks to the broad rally, and the measure finally rose above the 60% level to close the week near 61%.

Broad rally in equities

Short interest declined notably yet again, as investors further reduced their bearish bets due to the Fed’s reassuring message and the better-than-expected earnings reports. Our previous pick, MiMedx Group (MDXG) hit its highest level in two months on Friday, and since the stock has a short interest of 62% a technical breakout could be ahead. After having a terrible October, Hormel Foods (HRL) rallied strongly on Friday too, and given its very high days-to-cover (DTC) ratio of 16, it might be ready to bounce back. Microchip Technology (MCHP) also sports a DTC ratio of 14, and while the stock is still stuck in a consolidation pattern, the broad rally in stocks could trigger a short squeeze in the coming weeks.

We will have a relatively quiet week, in terms of economic releases, following this week’s craziness. Factory orders will come out on Monday, the ISM non-manufacturing PMI will be out on Tuesday, while Friday’s session will be highlighted by the first reading of the Michigan consumer sentiment number. While most of the key earnings reports are already out, we will still have a few interesting companies reporting, and bulls hope that the profit figure will continue to impress. Disney (DIS). Qualcomm (QCOM), CVS Health (CVS), and Duke Energy (DUK) could have the biggest impact, but it seems that U.S. companies avoided the dreaded earnings recession yet again. With technicals clearly pointing higher, should the date of the singing of the ‘phase one’trade deal with China be announced next week, we could be in for an epic rally in equities. Stay tuned!

 



About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver