Traders might have felt strange last week, as the price action in the stock market closely resembled quiet Christmas week trading. The major indices traded in a less than 1% wide range throughout the week, as most investors were probably more interested in the Olympics than financial markets. The Gorilla thinks that bulls should be content with these” boring” conditions, as one of the oldest rules of Wall Street says: “Never short a dull market!” The Q2 earnings season also finished on a positive note, with about 65% of companies reporting better-than-expected profits. The positive reports contributed to the rally of the past few weeks, following the “less than stellar” numbers published in the first quarter.
The unusual symmetry between the bond market and the stock market continues, as Treasuries are consolidating just below their all-time highs, along with the major stock indices. Yields remain under pressure “along the curve,” as economic numbers are mixed enough to justify the Fed’s “lower for longer” interest rate policy. On the other hand, economic trends are still positive enough to cause no real worries for investors just yet. The week’s most anticipated event is probably the release of the meeting minutes from the previous FOMC meeting on Wednesday, as the Central Bank’s view on the economy remains under close scrutiny. Before that, the widely watched CPI report will be released on Tuesday, while the Philly Fed manufacturing index will be published on Thursday.
The technical picture didn’t change much last week, as the sideways action left the underlying bullish trend intact, and a majority of stocks remained close to their respective all-time highs. The major indices are still in a favorable position, with no major “negative divergences” on the horizon. The Dow, the S&P 500, and the Nasdaq are all above both the rising 50-day and 200-day moving averages, and the Dow has been relatively strong following a weaker period. Small caps performed in line with the broader market, although the Russell 2000 finished the week slightly in the red. The Volatility Index (VIX) hovered just above its 52-week low near 11.50, which is still consistent with the generally bullish technical picture.
Market internals deteriorated somewhat last week, as small caps took a breather, but the Gorilla doesn’t see anything that should be a cause for serious concern for bulls. The Advance/Decline line is still marching higher, as advancing stocks outnumbered declining issues again, by a 2-to-1 ratio on the NYSE and by a 3-to-1 ratio on the Nasdaq. The average number of new 52-week highs rose slightly on both exchanges, to 230 on the NYSE and to 148 on the Nasdaq, while the number of new lows fell to 7 on the NYSE and to 32 on the Nasdaq. The ratio of stocks above their 200-day moving average rose even further, to another 3-year high, hitting an encouraging 74.5% on Friday.
The short-covering trend that has been dominating the list of the most shorted stocks on the NYSE and the Nasdaq continued, with the notable exception of the energy segment. The rally in the price of oil that started in February ended around the end of June, and some related stocks, like RPC Inc. (RES) with a short interest of 41%, and EP Energy (EPE) with a short interest of 52%, are slowly creeping higher on the list since then. Content creator Scripps Network (SNI) climbed to the podium of the list of the stocks with the highest day-to-cover ratio (DTC) last week, with a reading of 16 following the company’s bearish earnings report. The DTC ratio of VeriSign (VRSN) has been declining recently, and it is now well below 20, as bears seem to be quickly reducing their bets on the company.
The Gorilla thinks that the calm summer spell could continue this week, as the Olympic fever is still high, earnings season is nearly over, and economic numbers are still in the “comfort zone” of investors. The presidential campaign is still in full swing, but the stock market still looks immune to the, sometimes loud battles on the political field. That said, traders might experience more volatility later on this year, as the general election draws closer. Although these weeks could seem irrelevant to some investors, the Gorilla is glad that stocks firmly held their ground following the strong rally since the “Brexit” referendum. With that in mind, let’s hope that the sky remains clear for bulls in the coming weeks. Stay tuned!