August 13, 2018
While last week started in a positive fashion on Wall Street, bulls couldn’t maintain the momentum, and stocks retreated from their near-record-high levels as the weekend drew to a close. The continued woes regarding emerging markets were behind the pullback, as the dollar’s strength, together with rising bond yields and escalating trade tensions, created another full-blown currency crisis. This time in Turkey. The Dollar Index hit a new 13-month high thanks to the Fed’s tightening cycle and relatively strong economic growth, but despite the currency-headwind, domestic stocks are still head and shoulders above their international peers. The resilience of the major indices is even more impressive, given the still gloomy U.S.-Chinese relations and the widespread weakness in equities in Asia and Europe.
Only a few key economic indicators came out last week, and inflation measures were at the center of attention, with both the PPI and CPI indices being released. For the Fed, consumer prices are among the most important indicators, and according to the 0.2% monthly CPI figure, the rise in prices is in line with the goals of the Central Bank. That said, producer prices surprisingly stagnated in July, and that, together with the risk-off shift toward the end of the week, led to a decline in Treasury yields across the curve. On a positive note, weekly jobless claims continue to hover just above 200,000; the lowest in decades, and the robust labor market also points to a healthy economic growth amid the global slowdown in activity.
The technical picture remains positive, despite the late-week dip, as all of the major indices are still in clearly advancing trends. The S&P 500, the Dow, and the market-leading Nasdaq are all above their rising 50- and 200-day moving averages, even as the benchmarks got close to their short-term indicators on Friday. The Gorilla is also glad that small caps are once again showing relative strength, as it is a sign of confidence among investors, with the Russell 2000 trading above both moving averages, and just below its all-time high. The Volatility Index (VIX) got very close to hitting single digits last week, but as stocks turned sharply lower before the weekend, the VIX surged by more than 30% to close near 13 on Friday.
Market internals are little changed after the two-faced week, and the Gorilla thinks that the lack of deep negative divergences could mean that the current pullback is nothing more than a normal correction. The Advance/Decline line hit a new bull market high after more than a month, before following the indices lower, as advancing stocks outnumbered declining issues by a 2-to-1 ratio on the NYSE and by a 3-to-2 ratio on the Nasdaq. The average number of new 52-week highs was virtually unchanged on both exchanges, edging higher to 81 on the NYSE, and 84 on the Nasdaq. The number of new lows declined slightly, falling to 46 on the NYSE, and 79 on the Nasdaq. The percentage of stocks above their 200-day moving average decreased a bit to 51%, and the weak participation remains the primary concern for bulls.
The most-shorted issues took a small hit together with the broader market in the second half of the week, but there were still plenty of strong performances in the segment. Akcea Therapeutics (AKCA) is up by more than 40% since the beginning of July, and although it turned volatile after reporting earnings last week, given its 51% short ratio, bears are still in deep trouble. Century Link (CTL) also published its quarterly figures last week, jumping to a 12-month high after the release, and with a days-to-cover (DTC) ratio of 10, a sustained rally could easily turn into a short squeeze. Hormel Foods (HRL) sports an even higher DTC ratio of 16, and as the stock is in a very promising consolidation pattern just below its 2-year high, shorts should be afraid of a strong breakout.
While the first half of the week will be quiet with regard to economic releases, things could get more heated later on, as key indicators will be released concerning several segments of the economy. The most awaited retail sales report will come out on Wednesday, together with industrial production, while on Thursday, the Philly Fed Index, building permits, and housing starts will be in focus. The week will conclude with the UofM Consumer Sentiment Index, but the Gorilla thinks that despite the busy economic calendar, the stock market will likely be moved primarily by international developments. The brewing emerging market crisis could trigger a deeper correction in the coming weeks, but given the stable technical and fundamental backdrop, U.S. stocks should be able to weather another storm. Stay tuned!