August 6, 2018

While it’s hard to identify a clear trend looking at the price action of the last couple of weeks, the outcome of the “green-bar-red-bar” madness has to be encouraging for bulls. Despite the choppy environment, which is normal for an earnings season, and the divergences that the Gorilla pointed out several times, the major indices are near their recent highs, and the underlying bullish trend is in no danger. Apple’s $1 trillion landmark was all the rage throughout the week, and on Thursday, the tech giant finally hit the historic valuation level, boosted by its blowout quarterly numbers. (This was boldly predicted in the media last week by the Gorilla himself here). The U.S.-Chinese trade war saga provided the wall of worry yet again, as the Trump administration threatened to further raise tariffs on $200 billion worth of imports, pushing Chinese assets into turmoil and triggering a one-day scare on Wall Street.

It was a very busy week regarding economic releases, and as three of the most influential central banks (the Fed, the Bank of Japan, and the Bank of Englan) held monetary meetings, investors had a very busy schedule. While the week started out on a positive note, with the CB Consumer Confidence Index coming in better-than-expected, after that, it was all about disappointments. The ISM manufacturing and non-manufacturing indices both came in well below the consensus estimates, and the government jobs report was also a slightly negative surprise. The Fed responded to Trump’s critical comments with a clearly hawkish answer, refusing to change the bank’s tightening schedule, reiterating its prior take on the state of the economy.

The technical picture improved thanks to the dominantly bullish price action, and the major indices are now in similar setups, as the divergences between them got narrower last week. The Dow, the S&P 500, and the Nasdaq are well above both their rising 50- and 200-day moving averages, with their respective all-time highs now all being in sight. Small caps recovered encouragingly after a weaker spell, and the Russell 2000 is now back above its short-term moving average while being way above its rising long-term indicator too. The Volatility Index (VIX) experienced a one-day surge following the Fed meeting, topping out near the 15 level, but besides that, the fear index steadily drifted lower thanks to the positive catalysts.

The effects of the recent “mini-correction” are still visible looking at market internals, but the rebound in the Nasdaq and small caps boosted the most reliable measures last week. While the Advance/Decline line is still below its bull market high, the indicator looks ready to move higher, and advancing stocks outnumbered declining issues again, by a 4-to-1 ratio on the NYSE and by a 5-to-1 ratio on the Nasdaq. The average number of new 52-week highs fell on both exchanges, dropping to 80 on the NYSE, and 71 on the Nasdaq. The number of new lows increased, rising to 48 on the NYSE, and 91 on the Nasdaq. The percentage of stocks above their 200-day moving average bounced back to 52% with the help of small caps, but that is still suspiciously low compared to the near-all-time high level of the indices.

The most shorted issues had a great week, outperforming the broader market, as the risk appetite of investors increased on the heels of the record-breaking earnings season. New York-based REIT SL Green (SLG) hit a fresh 9-month high, in the face of the slowing housing market, and with short interest at 42%, bears could continue to fuel the rally. While Duluth Holdings (DLTH) has been correcting for over a month now, short interest in the stock is still at 50%, and the bounce toward the end of the week might be the start of the next leg higher. Henry Schein (HSIC) popped up on the list with the highest days-to-cover ratios, with a reading of 15, and while the stock is up by 15% in two months, a lot might be left in the tank.

Traders are likely in for a much calmer week after the recent tumultuous period, and since the stock market still looks as bullish as it gets, bulls might get to enjoy the summer. Inflation will be in focus this week, with both the PPI and CPI indices coming out on Thursday and Friday respectively. Other than those, there are no major economic releases scheduled, and the lack of catalysts means that technicals could play an important role. The Gorilla thinks that the major indices proved their strength yet again, easily recovering from the small correction, and as the divergences that preceded the dip eased, all looks set for another leg higher. While domestic stocks have endured the trade skirmish without major issues, some markets have suffered significant losses, and rising bond yields are also taking their toll globally, so risk management should remain a top priority. Stay tuned!