The bull market was back in full force on Wall Street until Friday, as small caps finally showed strength and broke out to new all-time highs as measured by the Russell 2000 Index. The healing process that started following the one-day correction in mid-May led to a robust rally in June, and all of the major indices were trading at, or near, all-time highs. What’s more, this advance defied a negative news cycle, as the Russia-scandal just got worse for the POTUS, while the British snap election ended in another Brexit-like surprise. Despite the week-long strength, something snapped on Friday, and stocks finished the last session of the week with a scary slump and a swift recovery. The decline in the leaders of the Nasdaq triggered the sell-off, following a negative report by Goldman Sachs (GS).
Economic numbers were generally in line with expectations albeit with a slight bearish tilt, as the ISM non-manufacturing PMI missed the consensus estimate by a hair, while new jobless claims were also a bit worse-than-expected. The releases are unlikely to change this week’s Fed decision, with the overwhelming majority still expecting another rate hike by the Central Bank. That said, the surprisingly dovish ECB statement last week, and the renewed uncertainty regarding the European political landscape, could push the FOMC toward a more cautious outlook, which could give a boost to stocks in the second half of the week.
Technicals are looking great, even following the dip in the Nasdaq, as the tech benchmark was way ahead of the other major indices thanks to its recent relative strength. The Dow and the S&P 500 are both well clear of their 50- and 200-day moving averages, as well as the Nasdaq; although the latter erased almost two weeks of gains in a matter of hours on Friday. The Russell 2000 was the brightest spot of the market last week, as it surged to a new all-time high for the first time since late April, confirming the previous week’s robust performance by the segment. The Volatility Index (VIX) hit yet another 24-year low on Friday, right before the spike lower in the Nasdaq, and it finished at a three-week high near 11 after the turmoil.
Market internals continued to improve before Friday’s correction, as the second strong week in a row for small caps boosted most of the key measures. The Advance/Decline line hit new highs amid the broad rally, as advancing issues 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 fell surprisingly on both exchanges, falling to 146 on the NYSE, and 180 on the Nasdaq. The number of new lows was little changed again, edging lower to 48 on the NYSE and 57 on the Nasdaq. The ratio of stocks above their 200-day moving average remained steady after the healthy rebound, and it closed the week unchanged at 65%, which is still on the low side for a bull market.
Short interest took another hit as volatility collapsed to another historic low, and some of the most shorted stocks experienced fierce rallies in the process. RH (RH), the leader of the short interest list jumped by more than 15% after the previous week’s slump, while the short interest in the stock rose to a whopping 65%. GoDaddy (GDDY) kept hitting new highs before pulling back on Friday, probably hurting bears badly, as short interest peaked at 48% during the week. Century Link (CTL) continues to look bullish, as it pushed to a new 7-month high after a brief consolidation, while the stock is still near the top of the list with the highest days-to-cover ratio (DTC) of 12. People’s United (PBCT) is also up by almost 10% this month, thanks to a strong two-day rally last week, while the DTC ratio still stands at 10.
The Gorilla has no doubt that Wednesday’s session will bring the most tension this week, as not only will the Fed announce its interest rate decision, but the CPI and retail sales reports will also come out during the day. The PPI index will be released on Tuesday, the Philly Fed Index will come out on Thursday, while building permits and housing starts will close the busy week on Friday. Apart from the Fed, the biggest question mark is once again Donald Trump, as it’s hard to judge how severe the current crisis will turn out for the President, as the Comey-case continues to evolve. The Gorilla will also monitor the “out of the blue” diplomatic crisis between Qatar and its neighbors, but bulls hope that stocks will remain as resilient as they have been in recent weeks. Stay tuned for an action-packed week!