Stocks Shrug Off War Fears As Nasdaq Surges

Commenting on today’s trading with a high ratio of gainers on the NYSE and NASDAQ, Gorilla Trades strategist Ken Berman said: 

Despite Friday’s dip, bulls had yet another encouraging week, and the low-volume pullback hasn’t changed the positive outlook for stocks.

With geopolitical tensions still being high, Friday’s pre-weekend profit-taking makes a lot of sense, especially given the fact that the major indices all hit record highs in early trading.

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The major indices all finished lower concluding a choppy session on Wall Street, as investors took some chips off the table ahead of the weekend break. The Dow was down by 134, or 0.5%, to 28,823, the Nasdaq lost 25, or 0.3%, to 9,179, while the S&P 500 fell by 9, or 0.3%, to 3,265. Decliners outnumbered advancing issues by a 3-to-2 ratio on the NYSE, where volume was well below average.

The week started out on a gloomy note, as the whole world was awaiting Iran’s answer to the airstrike that killed one of the country’s most important leaders, General Qasem Soleimani. While the Persian state did launch ballistic missiles against Iraqi bases that are housing U.S. troops, the fears of an imminent widespread conflict in the Middle East proved to be overly pessimistic. The major indices quickly recovered from the pullback, and thanks to the encouraging global economic numbers and the continued trade-related optimism, the benchmarks hit new all-time highs yet again. The tech sector spearheaded the recovery, and while safe-haven assets experienced a brief but explosive rally at the beginning of the week, bulls got clearly back in the driving seat later on.

High ratio of stocks gaining vs losing on the NYSE

The key economic releases were upbeat both in the U.S. and overseas, with especially the ISM non-manufacturing PMI making bulls smile on Tuesday. While the manufacturing measure hit a more than ten-year low in December, the services sector, which dominates the domestic economy continues to shine, and the PMI’s 55 reading makes a recession highly unlikely in 2020. That’s especially true considering the improving conditions in Europe, and even though the weakness in China is worrying, the ‘phase one’ trade deal and the recent monetary stimulus could lead to a rebound in the country. The non-farm payrolls number and hourly earnings missed expectations, but the labor market continued strong and the unemployment rate stood at 3.5% in December, near its multi-decade low.

The technical picture remains bullish across the board on Wall Street, despite the recent volatile pullbacks and the geopolitical tensions, and all of the key trend indicators continue to confirm the bull market. 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 failed to follow the large-cap benchmarks higher this week, and while the Russell 2000 is still above its short- and long-term moving averages, it remains stuck below its 15-month high from December. The Volatility Index (VIX) topped 16 and hit its highest level since mid-December on Monday, but thanks to the swift recovery, the ‘fear gauge’ closed the week lower, near the 12.5 level.

Small cap stocks

Although small-caps remained relatively weak this week, market internals continue to be bullish, and the most reliable breadth indicators aren’t pointing to an imminent correction despite the relentless late-year rally. The Advance/Decline line hit new bull market highs once again, 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 increased on both exchanges, rising to102 on the NYSE and 104 on the Nasdaq. The number of new lows was little changed, climbing to 11 on the NYSE and falling to15 on the Nasdaq. The percentage of stocks above the 200-day moving average briefly topped 70% this week for the first time in two years, and although the measure closed the weak near 69% again, participation in the really remains healthy.

Short interest decreased even more despite the escalating geopolitical tensions, as the subsiding trade-related worries and the improving economic outlook led to a decrease in hedging activity among equities. Although Planet Fitness (PLNT) experience quite a correction last year, this week it got within striking distance of its all-time high, and since its short interest is over 70%, a breakout could cause panic among shorts.

Tesla and other battleground stocks help ratio of gainers on the NYSE and Nasdaq

That dynamic was clearly present in the market of Tesla’s (TSLA) shares as well, and while the stock’s short interest is ‘only’ standing at 19%, the sheer size of the bearish bets all but guarantees further fireworks in the coming weeks. Our previous pick, Microchip Technology (MCHP) hit another new all-time high this week, and the stocks days-to-cover (DTC) ratio of 15 could mean that a short squeeze is ahead.

Given the uncertainty regarding the next steps in the U.S.-Iran standoff, the price of crude oil and gold will likely remain in focus, and the materials sectors cold see more volatile days. As for the economy, we will have key reports coming out every day apart from Monday, and we will get data from all of the key sectors. The Consumer Price Index and the Producer Price Index (PPI) will be out on Tuesday and Wednesday respectively, the Philly Fed Index will highlight Thursday’s session, and the week will end on a busy note, thanks to industrial production, building permits, housing starts, and the Michigan consumer sentiment number.

Treasury yields could also play a key role, and should the global economic rebound gain momentum, investors might start to worry about the possible rate hikes by the Fed, especially as the U.S. and China are scheduled to sign the ‘phase one’ trade deal next week. Stay tuned!