The correction of the past few weeks continued on Wall Street, but interestingly stocks ended the week well above their lows, just like they did a week ago. Despite the mid-week weakness, the Gorilla thinks that the underlying trend remains bullish. The Nasdaq continued to show encouraging relative strength, and finally, small caps seem to be “joining the party” as well. The Volatility Index (VIX) briefly rose above 17.50 on Thursday but ended the week around 15.50, well shy of the 20 level that’s considered a red flag for bulls. All in all, the market remained quiet, and experienced traders all agree that the lack of volatility is always a plus.
Central banks, this time, our own Federal Reserve, provided the week’s most influential release yet again. In the minutes of their previous meeting, Janet Yellen and the Fed reiterated their “data-dependent” stance on further rate hikes for the coming months. With the recent deterioration in some of the most important measures that the committee tracks, what’s coming next is anyone’s guess. It’s hard to predict whether the disappointing non-farm payrolls and PMI readings or the reviving consumer spending and inflation will be more important for the Central Bank. But before the next Fed meeting, investors will focus on the quarterly GDP print that will be published this Friday. Analysts expect a subdued 0.8% reading, but the Gorilla hopes that a positive surprise is in the cards.
The technical picture got slightly worse but the major support levels held up yet again, limiting the technical damage. The Dow and the S&P 500 broke below their short-term moving averages last week, but stayed well above their 200-day averages. The Nasdaq is still the most bearish among the benchmarks, but the picture is improving gradually. The tech index is now only about 1% below both its 50-day and its 200-day moving averages. The Russell 2000 performed a touch better than the large cap benchmarks, providing further hope for bulls here. The fact that the major indices are still only a few percent off their all-time highs means that stocks might be preparing for the next leg up.
Market internals maintained the bullish bias last week, and even the participation rate, which has been lagging other measures, improved slightly.
The Advance/Decline line continued to hover around new highs last week, still showing a bullish divergence. Advancing stocks outweighed declining issues by a 2-to-1 ratio on the NYSE and a 3-to-1 ratio on the Nasdaq, as tech stocks performed relatively well once again. The daily average of new 52-week highs decreased slightly on the NYSE to 140, and to 50 on the Nasdaq. On the other hand, only ten and six stocks hit new lows on the Nasdaq and the NYSE, respectively. The ratio of stocks above their 200-day MA recovered to more than 55%; a much-welcomed bullish sign for bulls.
Square (SQ) and Pure Storage (PSTG) are still on the top of the list of the most shorted stocks on the Nasdaq and NYSE, with short interests above 72% for both companies. Energy stocks improved their position considerably last week, and only RPC (RES), with a short interest of 45%, remained in the top 10 most hated stocks. It seems that oil at $50 per barrel is a real game changer for the industry. Biotech and healthcare stocks dominate the list now, in the aftermath of the increased speculation in those segments in recent years. The day-to-cover ratio (DTC) of Western Union (WU) increased again to 17, as traders boosted their bearish bets on the international payment giant. Bears shorting Verisign (VRSN) are still in the most vulnerable position, with a DTC ratio of over 22.
Mr. Trump, the presumptive nominee of the GOP, is closing in on Hillary Clinton in national polls, suggesting a possibly exciting contest in the general elections in November. If the trend continues, it might test the “ignorance” of investors towards the presidential race that has surprised the Gorilla so far. While the campaign fireworks might spice up the usual summer lull for traders, bulls hope that it will not affect the underlying bullish trend. Domestic stocks remained positive even in the face of the turmoil in international markets this year, and with the panic in commodities long gone, the Gorilla hopes for a positive ending for the month. Stay tuned!