April 16, 2018

It was another very choppy and indecisive week on Wall Street, as despite the gains in the major indices, the technical picture is virtually unchanged, while the global geopolitical situation got even more complicated. The trade skirmish between the U.S. and China is still a looming risk for equities, while the escalating tension regarding Syria added to the worries, as even the remote chance of a direct conflict with Russia is very bad news for investors. Given the gloomy backdrop, the actual performance of the stock market is commendable, as the Dow, the Nasdaq, and the S&P 500 all ended the week in the green. Small caps even out-performed the broader market, with the under-the-hood strength making the Gorilla smile.


The economic calendar was not very busy last week, but the few reports that came out have been very important in recent months, as inflationary fears started effecting stocks, and bonds even more. Both the PPI and CPI indices were released during the week, and both showed a mixed picture, with production prices coming in well above expectations, while consumer prices slightly missed the consensus estimate. The negative inflation measures, at least from a corporate standpoint, were not enough to break the tentative rally in stocks, and the hawkish FOMC meeting minutes only caused a short-term dip as well. Treasury yields ended the week on a positive note, at least on the short end of the curve, which could mean that the “reflationary” bullish trade is still on.


The technical picture was stable, as volatility declined substantially despite the fearful environment, as the most-watched indicators continue to show conflicting signals. The main benchmarks are still trading between their declining 50-day and their rising 200-day moving averages, signaling a bearish short-term and a bullish long-term trend in equities. On a positive note, small caps are in much better shape after last week’s rally, with the Russell 2000 recapturing its short-term moving average, while being well clear of the still rising long-term indicator. The Volatility Index (VIX) is also showing a more positive picture than what the price action in stocks would suggest, as the fear index is clearly trending lower, finishing the week at 17.50, back below the key 20 level.


Market internals still support the bullish case as well, as the most reliable measures are all neutral at worst, considering the recent correction. The Advance/Decline line is still well above the February low, as advancing issues outnumbered declining stocks by a 4-to-1 ratio on the NYSE and by a 3-to-1 ratio on the Nasdaq. The average number of new 52-week highs increased on both exchanges, rising to 41 on the NYSE, and 52 on the Nasdaq. The number of new lows dropped in the meantime, falling to 51 on the NYSE, and 47 on the Nasdaq. The percentage of stocks above their 200-day moving average climbed above the 50% level again, but this indicator is still the most concerning for the Gorilla.


The most shorted issues outperformed the broader market yet again, as bears who were waiting for new lows in stocks were squeezed by the grinding rally on Wall Street throughout the week. Applied Optoelectronics (AAOI) rose as much as 20% last week, and given its very high short interest of 68%, the stock might have a lot left in the tank. Match Group (MTCH) drifted higher again after a shallow correction, and with short interest still at 57%, another leg higher might be ahead. Diamond Offshore continues to top the list of highest days-to-cover ratios, with a reading of 16, and the stock blasted higher by almost 15% again, adding to the worries of trapped shorts.


This week will provide more input for investors, at least regarding the economy, with several important releases coming out on Monday and Tuesday. The much-anticipated retail sales report will come out on Monday, together with the Empire State Index, building permits, housing starts, and industrial production are scheduled for Tuesday, while the Philly Fed Index will be released on Friday. With all eyes on the Syrian situation and the Chinese trade war saga, wild swings might occur at any time this week, and with the earnings season heating up as well, investors could be in for a rollercoaster ride. That said, the Gorilla thinks that the underlying bullish trend could support stocks even in this risky environment. Stay tuned!