Stocks ended a strange and mixed week on a negative note Friday, as investors cheered the better-than-expected retail sales and consumer confidence data. The week was strange as traders saw the dollar and price of oil soar together; a rare phenomenon indeed. The major indices ended in the red, but the Gorilla noticed encouraging signs of internal strength “under the hood.” The Nasdaq finally showed some resilience, despite the subpar performance by Apple (AAPL), the most influential tech stock that weighed on the benchmark. The relative strength of the tech-heavy index is often a precursor of broader rallies, and bulls hope that this time will not be any different.
Economic numbers were somewhat better overall, which made investors rethink the odds of a rate hike in June. Oddly enough, the 10-year yield barely moved last week, while the 2-year yield shot up. This might mean that traders remain pessimistic about the long-term prospects, despite the slightly better short-term outlook. As for this week’s reports, the CPI reading on Tuesday, and the Philly Fed index on Wednesday should provide further hints on the health of the economy. Investors will also pay close attention to initial weekly unemployment claims on Thursday, following the surprisingly high reading of 294,000 last week.
The underlying technical strength that the Gorilla noted last week continues to boost the confidence of bulls. The major indices experienced a correction in the last two weeks for sure, but they remain within “striking distance” of their respective all-time highs. The Volatility Index (VIX) is not even close to being worrisome with a closing value of 14 on Friday. The S&P 500 and the Dow are in a similar and bullish technical position, while the Nasdaq still lags the other benchmarks, despite last week’s stronger showing. The tech index remains below both its 200-day and 50-day moving averages, with the S&P500 and the Dow still being above those key averages. The Russell 2000 closed right its the short-term average, which provided strong support all week for the small-cap benchmark.
The Gorilla still sees mixed market internals with a current slight bullish bias. The Advance/Decline continues to show a clear positive divergence, but with a large number of stocks seemingly “missing the party.” Advancing issues outweighed declining stocks by 3:2 on both the NYSE and the Nasdaq thanks to the relative strength of small caps. The daily average of new 52-week highs increased while the number of lows dwindled last week. 60 and 195 issues hit new yearly highs on the Nasdaq and the NYSE, respectively with 55 and 25 stocks hitting new lows on the Nasdaq and the NYSE, respectively. The ratio of stocks above the 200-day MA declined again to 53% as participation in the rally remains weak.
Despite the 50% rally in the price of oil, energy and related stocks still lead the list of the most shorted issues on the NYSE and the Nasdaq. The biotech sector is down by 30% on average since August, and quite a few companies made it to the most hated list again this week. Two tech firms with recent IPO’s are the most shorted issues currently, as Square (SQ) now has a short-interest of 73%, and Pure Storage (PSTG) is just shy of that with 72%. Go-pro (GPRO), only has a short interest of 24%, but if the trend continues, the struggling company might find itself near the top soon. Western Union (WU) still has a day-to-cover ratio (DTC) of 16 despite the neutral price action, while Grainger’s (GWW) ratio improved significantly from 18 to 14 in one week; a very bullish sign.
Despite the slightly gloomy finish, stocks ended the week close to unchanged. The third week of this correction helped to further clear the “overbought” condition that prevailed on Wall Street following the spectacular two-month rally. Bulls should be delighted that no real damage has been done to the underlying advancing trend. So, while it’s wise to keep an eye on the key support levels below current prices, the Gorilla thinks that new all-time highs are in the cards later this month. It has been quite a ride so far for investors this year, and believe it or not, we are only a couple of weeks away from summer. Let’s hope that bulls will enter June with a smile on their face. Stay tuned!