The major indices recovered well following the long Easter weekend, as Wall Street registered a surprisingly bullish week in the face of significant headwinds, led by small caps and the Nasdaq. Earnings reports, economic numbers, and political news were all mostly negative, although the previous week’s geopolitical tensions eased somewhat. That said, the close race for the French presidency, involving some “scary” contenders (which was resolved overnight and should result in a strong open), and the North Korean situation, still weighed on investor sentiment. A lot of the biggest names from various industries disappointed with their quarterly numbers last week, including Johnson & Johnson (JNJ), Goldman Sachs (GS), General Electric (GE), Philip Morris (PM), and Verizon (V). Only some of the financials posted encouraging numbers in the rising interest rate environment.
The string of negative economic surprises continued for the most part of the week, with only the better-than-expected existing home sales number boosting investor confidence on Friday. Before that, the Philly Fed Index, the Empire State Manufacturing Index, housing starts, and the capacity utilization rate all came in below consensus estimates. On a bullish note, building permits and industrial production were in-line with expectations, while the number of new jobless claims was only slightly higher-than-expected. Overall, the economy is still in good shape, but the momentum of the growth is a bit weaker. Reacting to that, some Fed officials already voiced their concerns regarding the optimal number of rate hikes in 2017.
The technical picture is still a mixed bag, although some of the indices registered bullish changes last week, thanks to the broad rally on Wall Street. The Nasdaq surged back toward its all-time highs after finding support near its 50-day moving average, although the S&P 500 and the Dow remained below their short-term indicators. All three of the major benchmarks are well above their 200-day moving averages. The Russell 2000 recovered above its short-term average as well after almost three weeks. The Volatility Index (VIX) retreated from its 6-month high above the 16 level, but it still finished near 14.5; way north of the average reading of 2017.
Market internals improved after the previous deterioration, as the positive divergences that the Gorilla saw led to a notable uptick in the most reliable measures. The Advance/Decline line remains a bright spot, hitting yet another new all-time high on Thursday, as advancing issues outnumbered declining stocks 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 rose further on both exchanges, climbing to 98 on the NYSE, and 85 on the Nasdaq. The number of new lows was virtually unchanged, edging higher to 22 on the NYSE, and 42 on the Nasdaq. The ratio of stocks above their 200-day moving average produced a healthy rebound, pointing to strength “under the hood,” and finished the week just below 69%, despite the pronounced weakness in the energy sector.
Short interest declined once again as the major indices climbed back towards their all-time highs after the previous week’s bearish move, although oil-related issues were once again under pressure. GoPro (GPRO) is already up by 20% since hitting bottom in March, despite a short interest of 48%. Spark Energy (SPKE) might also be ready to jump again, after a 50% rise in two months, as short interest is still at 48%. Air delivery company Expeditors International (EXPD) is now in the top 10 on the list of the stocks with the highest days-to-cover ratio (DTC), with a reading of 11, while the stock has been creeping higher to new highs throughout the year so far. Digital Realty (DLR) hit a new all-time high each day last week, and the pressure on shorts continues to mount, with the DTC ratio hitting 14.
Traders are in for a busy week regarding earnings reports, as some of the largest tech giants will release their quarterly numbers. Given the recent strength in the Nasdaq, Amazon (AMZN), Microsoft (MSFT), and Alphabet (GOOG) all have the potential to move the market, while the likes of Exxon Mobil (XOM), Procter & Gamble (PG) and AT&T (T) will also be closely watched. Bulls will be looking for improvements in economic numbers. The Consumer Confidence Index on Tuesday, the durable goods report on Thursday and the advance GDP reading on Friday will provide plenty of opportunity for positive surprises. The Gorilla also hopes for a more peaceful period on the political front that could help the current rally to last for several weeks. Stay tuned for an eventful week!