April 30, 2018

Stocks finished virtually unchanged for the second week in a row, despite some significant swings in both directions, as the correction that started in February is still dominating Wall Street. There was no shortage of catalysts, as economic releases, earnings reports, geopolitical events, and central bank meetings all provided ammunition for traders, but the major indices didn’t make any progress. The flat week is slightly worrisome for the Gorilla, as the mentioned catalysts were mostly positive, and still, the February lows are not far below the current price levels. That said, the underlying bullish trend is clearly intact, and the longer the consolidation lasts, the more powerful the next rally could be.

The economy continues to be stable with no sign of a looming recession, even as a lot of analysts argue that we are very late in the economic cycle. Consumer confidence is near record levels, and it unexpectedly rose once again this month, despite the ongoing correction in the stock market and the stormy geopolitical backdrop. The advance GDP print also came in above the consensus estimate, at an annualized rate of 2.3%, while core durable goods orders provided the only major negative surprise. The bond market continues to reflect the favorable economic trends, at least as far as the next couple of years are concerned, as Treasury yields continue to hit new decade-long highs, boosting the value of the dollar as well.

Not surprisingly, the technical picture is little changed, still showing a slightly declining short-term and a rising long-term trend. The Dow, the S&P 500, and the Nasdaq are all stuck between their declining 50-day and the rising 200-day moving averages, while holding up above the crucial support levels that are getting a lot of media attention these days. While small caps lost some of their relative strength toward the end of the week, the Russell 2000 is still in a better technical position compared to the broader indices, hovering around its rising short-term moving average. The Volatility Index (VIX) continues to support the bullish case, as it closed the weak near its one month low at 16; well below the key 20 level.

Market internals improved slightly again, despite the neutral price action, making the Gorilla cautiously optimistic regarding the direction of the next major move in stocks. The Advance/Decline line is still pointing to strength under-the-hood, with the indicator being just below its bull market high, as advancing stocks outnumbered declining issues by a 3-to-2 ratio on the NYSE and by a 4-to-3 ratio on the Nasdaq. The average number of new 52-week highs was stable on both exchanges, edging higher rising to 57 on the NYSE, and 61 on the Nasdaq. The number of new lows spiked higher in the meantime, rising to 100 on the NYSE, and 88 on the Nasdaq. The percentage of stocks above their 200-day moving average is still a hair above the 50% level, as the participation rate in the bull market remains low.

Short interest slightly declined, in line with the falling VIX, but bearish positioning is still well above last year’s levels, as the major indices are unchanged year-to-date, following the steep correction. RH Corp. (RH) has been consolidating ever since surging higher in March, but the stock rallied 10% in the last half of the week, and given its short interest of 42%, another explosive leg higher is possible. Hormel Foods (HRL) climbed to the top of the list of issues with the highest days-to-cover (DTC) ratios, with a reading of 15, as the stock defied odds, and rose to a new 4-month high last week, putting even more pressure on shorts. Extra Space (EXR) traded at the highest level since 2016 on Friday, and with a DTC ratio of 12, the stock could be ready for more gains fueled by short covering.

All eyes will be on the Fed and Jerome Powell this week, as investors seem to be divided about the timing of the next tightening step by the Central Bank. Rate hike odds are currently around 30% with regard to Wednesday’s rate decision, and this kind of division usually leads to a violent reaction by the market. Before the Fed, pending home sales are scheduled for Monday, and the ISM manufacturing PMI will be released on Tuesday. The ISM non-manufacturing PMI is coming out on Thursday and the busy week will likely end with a bang, as the government jobs report always has the potential to move the market. The Gorilla thinks that the extended, post-correction consolidation period means that energy is building below the surface, and once prices break-out, a strong move will likely begin, so stay tuned for a crucial week on Wall Street!