The major indices followed the bullish scenario so far, as the technical correction continued to unfold in a rather quiet manner. The Gorilla didn’t notice the signs of a major breakdown in the market. Stocks bounced higher off their previous lows in a choppy environment, led by the Nasdaq once again. Traders had a relatively calm and mixed week regarding economic news as well, as foreign central banks took center stage. The European Central Bank left its benchmark interest rate unchanged, as it was widely expected, but Mario Draghi was “dovish” as usual before the crucial Fed meeting in November, triggering a strong rally in the dollar.
The most awaited economic indicator, the Philly Fed index came in at 9.7, beating analyst estimates handily in September. The housing market provided mixed readings, as housing starts missed expectations, but the number of building permits was surprisingly high in the same period. All in all, economic trends still seem to provide a good enough background for Janet Yellen and the Federal Reserve to raise interest rates in November, despite the slight drop in Treasury yields last week. Investors need to wait until Friday for this week’s most important report, the advance GDP print, while the consumer confidence index and the durable goods report will come out on Tuesday and Thursday, respectively.
Technicals remain mixed, but the overall picture is still bullish, despite the recent correction. The Gorilla thinks that the relative strength of technology stocks, as measured by the Nasdaq continues to be a positive sign. The tech benchmark closed a hair above both its rising, 200-day moving average and its declining 50-day moving average. The Dow and S&P 500 are in a more bearish position, with both of the indices trading between their declining short- and their long-term averages. Small caps remained weak compared to the large cap indices for the third week in a row, although the bullish reversal on Friday propelled the Russell 2000 into the green for the week. The Volatility Index (VIX) drifted lower all week long and it stood near 13 on Friday, showing an encouragingly low reading for bulls.
Market internals improved marginally last week, providing a base for the bounce and causing a sigh of relief among bulls, despite the obvious weakness in small caps. The Advance/Decline line trended higher after a brief decline last week, as advancing stocks outnumbered declining issues, by a 3-to-2 ratio on the NYSE and by a 3-to-1 ratio on the Nasdaq. The number of new 52-week highs was stable on both exchanges, rising to of 68 on the NYSE and 61 on the Nasdaq. The number of new lows declined on both exchanges, to 22 on the NYSE and to 65 on the Nasdaq. The ratio of stocks above their 200-day moving average also improved to 68%, well above the previous week’s reading.
Short interest continue to be lower than in recent years, despite the slight dip in prices, as energy stocks and materials remained among the most shorted issues on both the NYSE and the Nasdaq, with commodities still being under pressure. The short interest in EP Energy (EPE) continued to climb, and it now stands at the 53%, while drilling equipment provider RPC (RES) also has a short interest of 49%, despite rallying 30% since mid-September. Analytic data solutions provider Teradata (TDC) appeared on the podium of the list of the stocks with the highest the day-to-cover ratios (DTC), with a reading of 16. Verisign (VRSN) remained on the top of the list with a DTC ratio of 18, as the company is scheduled to report earnings this week.
With only two weeks remaining until the presidential election, Mrs. Clinton has a lead over Mr. Trump, and the Gorilla noticed that investors mostly ignored campaign-related news since the “polling-gap” opened up again. The end of the unusually long and loud campaign is probably welcomed news for most traders, while the Fed might be more willing to raise interest rates without the “political uncertainty.” The ongoing earnings season will likely heat up in the coming weeks as well, which could lead to more day-to-day volatility, even if the current correction ends soon. With that in mind, stay tuned for another exciting week on Wall Street!