In a shortened week plagued by negative economic news, stocks were flat. Consumer confidence missed expectations as did the non-manufacturing PMI, and the week ended with the worst jobs report since the September of 2010. Friday virtually answered all the questions regarding a possible rate hike on the Fed’s next meeting. It’s hard to imagine that Yellen & Co. would go ahead with further monetary tightening in a month that saw a non-farm payrolls number of 38,000. Analysts expected 159,000 new jobs, and besides the huge miss in the headline number, April’s reading was also revised lower by 40,000, to a mediocre 129,000.
But before traders panic, the Gorilla thinks that it’s best to take a step back and look at how the market reacted to all of the negatives. Objectively, the price action was neutral at worst and promising at best. Stocks retreated on Friday for sure, but the less than one percent decline on such a negative surprise is hardly tragic. The Gorilla is curious to see how the market will perform this week in the absence of significant economic releases, and ahead of next week’s Fed meeting. This week, both Janet Yellen and Mario Draghi will hold speeches, on Monday and Wednesday respectively, and investors’ favorite central bankers usually have something up their sleeves.
The technical picture didn’t change much; in fact, the Gorilla noticed further strength among small caps that should calm the nerves of bulls. All three of the major indices are still above the 50-day and the 200-day moving averages and now the Nasdaq, the Dow, and the S&P 500 are joined by the Russell 2000 in the “club.” As a bullish sign, the tech benchmark and the small cap index took over the leadership, and the Dow provided the worst performance last week. The Volatility Index (VIX) is still consistent with a bull market, as the 14 reading points to a low level of fear among investors, despite the negative news flow.
Market internals remained strong and some measures improved even further, with the help of small caps. The Advance/Decline continued to hit new highs another new high as advancing stocks outnumbered declining issues by 2-to-1 ratio both on the NYSE and on the Nasdaq. On another positive note, the daily number of new 52-week highs jumped to 130 issues on the NYSE, while it remained steady at 80 on the Nasdaq. Still only an average of 7 and 20 stocks hit new lows on the NYSE and the Nasdaq respectively. About two-thirds (65%) of the listed companies traded above the 200-day moving average for the second week in a row; a significant improvement from the first four months of the year, when participation was the “weak spot” of the bull market.
The list of the most shorted stocks was mostly unchanged on the NYSE and the Nasdaq, with only a few new stocks popping up on the radar. Biotech and healthcare companies dominate the list as the short interest in oil-related firms continued to decline. Real estate lender Bofi Holding (BOFI), with a short interest above 42%, is the first financial company in a long time to make the top 10. High-tech companies Square (SQ) and Pure Storage (PSTG), and food producer Cal-Maine (CALM) are the three issues with the highest short-interest, with totals of 72%, 59%, and 56%. Verisign (VRSN) still has the highest day-to-cover ratio (DTC) among large caps, as shorts would need 22 days to exit their positions
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Investors prepare for another major event this month, besides the Fed meeting, as voters of the United Kingdom decide whether the country should stay a part of the European Union (EU) or not. Fed officials repeatedly warned that the “Brexit” would pose a significant risk to the global economy, and that it could influence the Central Bank’s policy. Two new polls came out last week that signaled a very tight race between the pro-EU and the anti-EU sides. The releases managed to cause a sell-off even in U.S. stocks. So with the Fed’s decision and the British vote drawing closer, June might surprise traders with more excitement than usual. Stay tuned for an interesting week and hopefully another bullish month!