It was one of those weeks that if you are a bull, you probably would have wanted to miss. Political intrigue in Washington over leaks, Russia, firings, secret tapes and notes took center stage. The stock market had ignored most of the drama surrounding the firing of FBI head James Comey, but on Wednesday, the market went into a spasm. Talk of the President “crossing the line” in talks with Comey took hold, and the stock market went into a free-fall amid talk of possible obstruction of justice charges against Trump. Talk of “impeachment” swirled, and the stock market retreated in a big way on Wednesday.
It seemed as though Washington DC and the Trump Administration were unraveling, and all of a sudden all of that uncertainty played out in the stock market. Money flowed into Treasuries and gold, and stocks sold off hard and fast. The amazing thing about this week, though, was the bounce we saw on Thursday and Friday. When the closing bell rang on Friday, it was almost as if nothing had happened this past week, and if you had not been paying attention, you would have shrugged your shoulders. The overall week saw the Dow and S&P down 0.4% and the Nasdaq 0.6% lower.
Volatility and fear levels surged on Wednesday, as we saw the Volatility Index (VIX) pop above 16 after beginning the week around the historically low 10.50 level. This “fear factor” index is amazing in the sense that when technicians and strategists see it “too low for too long,” they always prepare for something negative. That was exactly what we saw happen this week, but the VIX did show that fear levels retreated markedly on Thursday and Friday as it closed out the week just above the 12 level. Once again, what looked like a meltdown on Wednesday turned into just a slightly lower week for the stock market.
Two events that did help the stock market on Friday were comments from St.Louis Fed President Jim Bullard and earnings from tractor and equipment maker John Deere (DE). Bullard made comments that the Fed might hold off on a rate hike in June as a result of the weak economic numbers for the first half of this year. He also hinted that QE or quantitative easing still is on the table if the economy or stock market weakens in the weeks and months ahead. This was a “nod-nod, wink-wink” to the stock market that the Fed will step in quickly if anything were to spin out of control, and whenever investors hear of QE, the stock market tends to rally.
The Deere (DE) earnings number sent the stock up 7% on Friday and was interesting in that it showed strength in the “real” economy that actually makes “real” things like tractors. Companies like Facebook (FB) or Snapchat (SNAP) are fresh and new, but we still need industrial companies to do well in order to drive the broader economy. The combination of Bullard’s comments and DE did provide a positive backdrop nonetheless on Friday that helped the rough-and-tumble week end on a positive note.
What was a big technical positive for the week was seeing the Dow and the S&P bounce back and close above their respective exponential 50-day moving averages of 20,738 for the Dow and 2,367 for the S&P 500. They had dipped below those levels on Wednesday, so it was great to see those levels hold and to see a bounce. The Nasdaq did not dip below its 50-day moving average of 5,965, and that was another plus from a technical perspective. At a Friday close of 1,367, the small-cap Russell 2000 is still stuck below its 50-day moving average of 1,380, but it will hopefully top that level in the week ahead.
On an economic note, we get the “revised” GDP number for first quarter GDP out next Friday, and expectations were raised to 0.9% from the previous 0.7%%. The previous expectation for first quarter GDP was 3.0%, and it is clear that we are nowhere near that number, so someone or something is quietly ratcheting down that 3.0% number. The final GDP report for the first quarter is due out on July 1st, so we will see what kind of “expectations” appear on Friday. That said, the Gorilla wishes each and all a relaxing May weekend, and we will be back in action on Monday. Have a great weekend!
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