Stocks had a very busy week, as the earnings season heated up, the Federal Reserve held its monetary meeting, and the leaders of the Nasdaq scared traders with another “flash crash.” With more than $3 trillion of market capitalization erased during the week the increased volatility is understandable. The released numbers were mixed, with AT&T (T), Facebook (FB), and Coca Cola (KO) being among the notable positive surprises, while Alphabet (GOOG), Amazon (AMZN), and Exxon (XOM) missed consensus estimates in the second quarter. Interestingly, the sharp decline in the Nasdaq wasn’t triggered by earnings, in fact, it came out of the blue on Thursday once again, leaving traders questioning the stability of the market.
Economic numbers, at least the “hard” numbers, were disappointing, with core durable orders, existing home sales, and new home sales all coming in below expectations. On a positive note, the CB Consumer Confidence Index rebounded strongly after its recent dip, and despite the lackluster CPI and retail sales numbers. This measure of the segment remains close to its decade-long high. The most awaited prelim GDP release was slightly confusing, as the headline number was a tad better-than-expected, but the price index was well off the consensus, pushing the dollar and Treasury yields lower. The dovish tone of the FOMC statement had similar effects, with investors already questioning the tightening roadmap of the Fed.
Technicals remained bullish across the board, despite the late-week correction, as all of the major indices are still clearly in rising short and long-term trends. The Dow, the S&P 500, and the Nasdaq are above both their 50- and 200-day moving averages, although only the Dow finished at a new all-time high on Friday, outperforming the broader indices. The Russell 2000 showed worrying weakness, especially toward the end of the week. However, the small cap benchmark is also north of the moving averages, even after three negative days in a row. The Volatility Index (VIX) spiked higher off its mid-week all-time lows thanks to the correction, but it still finished at an historically muted 11 level on Friday, as the market settled down.
Market internals are looking less stellar than before, as the weakness in small caps took its toll, but the bull market is in no danger by any means. The Advance/Decline line turned flat during the week, even before Thursday’s plunge, but advancing issues still outnumbered declining stocks by a 3-to-1 ratio on the NYSE and by a 2-to-1 ratio on the Nasdaq. The average number of new 52-week highs dropped slightly on both exchanges, falling to 155 on the NYSE, and 156 on the Nasdaq. The number of new lows increased in the meantime, rising to 22 on the NYSE, and 41 on the Nasdaq. The ratio of stocks above their 200-day moving average fell significantly amid the broad correction, finishing the week at 66% again after breaching the 70% level earlier on.
Short interest followed the VIX lower in the beginning of the week, and it remained at record lows, as the energy sector experienced a healthy bounce thanks to the jump in the price of crude oil. Shorts of department store Dillard’s (DDS) are being squeezed hard, as the stock gained almost 40% in two weeks, while short interest still stands at 43%. RPC Inc. (RES) is in the top 10 of the most shorted list, with a short interest of 53%, and if the price of oil continues to rise, bears might be in for a stressful period. Verisign (VRSN) hit a new all-time high on every single day last week, and with its days-to-cover (DTC) ratio being at 18, a lot of shorts are feeling the pain. Hormel Foods (MRL) is also moving up the list with the highest DTC ratio, now sporting a reading of 15, and the stock showed encouraging strength recently.
The economic calendar will be quite busy for the second week in a row, as the Fed meeting will be followed up by the pending home sales report on Monday, the ISM manufacturing and services PMIs on Wednesday and Thursday, and of course, the always crucial Jobs Friday. The Gorilla hopes that the brief jump in volatility won’t lead to a multi-week correction as it did in June, and the major indices will be back on track for new all-time highs this week. The negative seasonality and the increasing domestic political tensions might weigh on equities, but the bull market has proved its resilience many times before. With no major negative catalyst on the horizon, bulls should continue to enjoy the summer, while keeping an eye on the market. Stay tuned for an action-packed week!