The stock market had a mixed and volatile week, as the earnings season reached its peak, causing significant moves in several crucial stocks, including Apple (AAPL), Amazon (AMZN), Exxon (XOM), and Google parent Alphabet (GOOG). The major indices provided mixed signals for traders, as the Nasdaq even hit a new bull market high on Monday, before turning lower toward the end of the week. Small caps, on the other hand, remained relatively weak, and that weakness “infected” the large cap indices as well, with rate hike fears intensifying before this week’s key Central Bank meetings.
Economic numbers continued to be just good enough to justify an increase in the Fed’s benchmark rate, with the labor market still being strong, but the housing segment showing signs of a slowdown last week. The Gorilla thinks that there might have been better opportunities for the Central Bank to tighten earlier on in this cycle, when the economy was growing at a healthier rate than the current 1.4%. This week might be the most action-packed one of the whole year, as far as economic releases are concerned. The crucial FOMC meeting is scheduled for Wednesday, non-farm payrolls will be released on Friday as usual, while the manufacturing and non-manufacturing PMIs will come out on Tuesday and Thursday.
Technicals deteriorated somewhat after an encouraging bounce the week before last, with the long-term picture remaining bullish, especially given the continued strength of technology stocks. The Nasdaq closed just below both its rising 200-day moving average and its flat 50-day moving average, but the benchmark remains above the key technical “support” levels for now. The Dow and S&P 500 are also below their short- and long-term averages, albeit in slightly more bearish positions. Small caps were underperforming the broader market throughout the week, as the Russell 2000 hit a 4-month low, and closed well below the key moving averages. The Volatility Index (VIX) turned higher again, but it remained below the recent highs near 18, finishing the week at a modest 16.50 reading.
Market internals were hit hard by the weakness in small caps, but the current picture is still consistent with a correction in the ongoing bull market. The Advance/Decline line is still just below its all-time high, although it headed lower again last week, as declining stocks outnumbered advancing issues, by a 3-to-2 ratio on the NYSE and by a 2-to-1 ratio on the Nasdaq. The average number of new 52-week highs increased across exchanges, rising to of 72 on the NYSE and 75 on the Nasdaq. The number of new lows jumped higher on both exchanges, to 48 on the NYSE and 90 on the Nasdaq. The ratio of stocks above their 200-day moving average fell significantly, but remains clearly in bull market territory, despite hitting the lowest reading since late June at 62%.
Short interest was stable last week, although the earnings releases did cause some turbulence, with the oil & gas sector still dominating the list of the most shorted issues on both the NYSE and the Nasdaq. The short interest in Twilio (TWLO) continued to rise and hit 50%, as the stock halved in October alone. The short interest in online lender LendingTree (TREE) also increased, to 51%, as the stock plunged by 10% following its earnings report. Packaging firm and current GorillaPick, Ball Corp (BLL), jumped to the third place on the list with the highest day-to-cover (DTC) ratios, with a reading of 19. Block (HRB) is also a new member on the list, with a DTC-ratio of 16, as the shares of the tax service provider fell by almost 50% since the beginning of the year.
After the much-awaited decisions by the Fed and the Bank of Japan, the Presidential election will take place next Tuesday. Barring a huge turnaround in the last week, Mrs. Clinton will likely be victorious according to the latest polls. Investors might pay more attention to the campaign than they have done before, but the disappointing earnings releases so far could very well take center stage again. Facebook (FB), Warren Buffet’s Berkshire Hathaway (BRK-A), and Pfizer (PFE) are among the companies that will publish their quarterly numbers. Stay tuned for a possibly wild week on Wall Street!