As the correction continued on Wall Street last week, traders have been looking for the reason of the recent downturn, and the Gorilla thinks he might just have the answer. The end of the earning season is drawing closer and the picture is not pretty. According to early aggregates, profits declined by 7% on average from the first quarter of 2015. That qualifies as an earnings recession, but thankfully that doesn’t necessarily translate into a “real” recession, not to mention a bear market. And in the light of these numbers, the market’s resilience might actually be quite encouraging for bulls.
Besides the mostly negative earnings, economic numbers have also been lackluster of late. The 160,000 non-farm payroll reading, the disappointing manufacturing PMI, and the uptick in new jobless claims far outweighed the slight beat in the non-manufacturing PMI. Trader’s will likely focus on overseas economic news this week, with no key data coming out until Friday’s retail sales and consumer sentiment releases. The 10-year yield dipped below 1.8% again last week, and investors will keep on paying close attention to the bond market. It’s the best way to gauge what the market expects from the Fed. For now, odds favor no change in the benchmark rate until September.
The first week of May saw losses for the major indices (conversely, nearly 5 GorillaPicks rose for every two that fell), but the technical damage seems to be limited, for now. There are clearly bullish signs that point to this decline being nothing more than an orderly correction. The low value of the Volatility Index (VIX) is a huge plus, and the bullish alignment of the crucial moving averages is also encouraging. The S&P 500 and the Dow still look healthier than the Nasdaq. The technology index closed below both its declining 200-day moving average and its rising 50-day moving average. The two other large cap benchmarks are still above the rising short and long-term moving averages. The Russell 2000’s weakness remains a concern, but the Gorilla was glad to see a stronger showing from small caps on Friday.
The bullish divergence of the Advance/Decline line continues to suggest favorable market internals, despite some worryisome participation numbers. Advancing issues were outnumbered by declining stocks by around 2:1 on the NYSE and 3:1 on the Nasdaq. The daily number of new 52-week highs and lows were mixed, with more bullish numbers on the NYSE. Forty-five and 135 issues hit new yearly highs on the Nasdaq and the NYSE, respectively. The number of new lows jumped to around 60 and 26 stocks on the Nasdaq and the NYSE, respectively. The ratio of stocks above their 200-day MA stands at 56% following a sharp decline, and that is still the most worryisome measure for bulls.
Energy companies still dominate the list of the most shorted stocks on both the NYSE and the Nasdaq. The biotech and healthcare sectors are also overrepresented, with some laggards of the software application segment filling up the ranks. Square (NASDAQ: SQ), with a short interest of over 67%, is now the most shorted mid- to large-cap stock, following a -30% week and a disappointing earnings report. The short-interest in Cal-Maine Foods (NASDAQ: CALM) also increased to 58%, with Adeptus Health (NYSE:ADPT) also on the”podium” with a short interest of 53%. Domain service provider Verisign (NASDAQ:VRSN) still has a day-to-cover ratio (DTC) of 23, and Grainger (NYSE:GWW) could be also set for a strong rally with a DTC of 18.
Wall Street finished last week on a positive note, and the Gorilla hopes for a similar start this week. Donald Trump’s victory in Indiana sealed the GOP nomination for him, as his rivals dropped out in the aftermath of the vote. The Clinton-Trump match-up on the general election will be the hot topic for the coming months, given the heightened media attention. The price of oil might get volatile again, as the supply situation is far from being rosy, and the price action turned a bit bearish last week. So, despite the lack of economic news, traders could be in for another wild, but hopefully bullish week. Stay tuned for more from the Gorilla!