July 16, 2018
Bulls scored another victory last week, despite a mid-week dip, as the major indices finished firmly in the green amid the re-surfacing trade war fears. Trading volume is consistent with the usual summer lull, but in spite of the reduced activity, a clearly positive trend dominated Wall Street for the second week in a row. The bullish wave carried the market-leading Nasdaq to a new all-time high, but on a positive note, the previously lagging Dow and S&P 500 also gained ground, and the latter hit a fresh 4-month high. The market is slowly leaving behind the deep spring correction, and while there are obvious international headwinds, stocks are still on the right track following a prolonged period of back-and-forth price action.
Inflation was clearly at the center of attention last week, with regard to economic releases, especially after the “Goldilocks” government jobs report that showed lower-than-expected wage growth in June. Price changes in the same period were mixed according to the CPI and PPI indices, as purchasing prices grew faster than expected, while consumer prices missed the consensus estimate, at least as far as the headline number is concerned. The more reliable core CPI index changed in line with expectations, and as the overall picture didn’t change drastically, stocks and bonds weren’t affected too much by these usually crucial reports. Weekly jobless claims fell unexpectedly to 214,000, and Treasury yields kept on edging higher in the quiet environment, as the positive economic mega-trends are still intact.
The technical picture improved significantly as the lagging indices played catch up with the leading benchmarks, and now there are bullish setups across the board. The Dow and the S&P 500 left behind both their 50- and 200-day moving averages after the recent correction, and the indicators are still advancing, despite the long period of relative weakness. While the Nasdaq and the Russell 2000 remain ahead of the pack, well above both moving averages, the small-cap benchmark finished last week in the red, even as the tech index marched on to new record highs. On a positive note, the Volatility Index (VIX) still points to optimism among investors, and the measure of fear got close to its lowest level since January thanks to last week’s rally.
Market internals continue to point to a mixed picture, and last week’s pullback in small caps resulted in a slight deterioration in some of the key measures. The Advance/Decline line failed to follow the Nasdaq to a new high for example, even though advancing stocks still outnumbered declining issues by a 3-to-1 ratio on the NYSE and by a 4-to-1 ratio on the Nasdaq. The average number of new 52-week highs ticked higher on both exchanges, rising to 105 on the NYSE, and 115 on the Nasdaq. The number of new lows also increased slightly, reaching 50 on the NYSE, and 48 on the Nasdaq. The percentage of stocks above their 200-day moving average is virtually unchanged at 52%, as the Nasdaq’s advance wasn’t enough to outweigh the weakness in small caps last week.
Although the most shorted issues failed to maintain their momentum so far in July and, similar to small caps, lagged the broader market somewhat, there were still plenty of great performances among them. Home furnishing chain RH (RH) has been consolidating for three weeks after a more than 50% rally in June. It finally showed signs of strength on Friday, and the short interest of 39%, it could propel the next leg higher. Transdigm (TDG) has been one of the most consistent stocks ever since the February mini-crash, and it surged to another new all-time high, despite a very high days-to-cover (DTC) ratio of 12. Centurylink (CTL) also sports a DTC ratio of 11, and since the stock just breached its 2018 high, a short squeeze could just be ahead.
Traders are in for a much busier week concerning economic numbers, with important releases coming out almost every day. The week will start with a bang, as the most-awaited retail sales report is scheduled to be released Monday, and after last month’s blowout report, bulls are hoping for something similar to boost the rally. After that, industrial production will be released on Tuesday, building permits and housing starts are coming out on Wednesday. The Philly Fed Index will close the economic week on Thursday. Despite the robust advancing trend on Wall Street, the Gorilla will keep an eye on emerging markets, as in the past, domestic stocks could only temporarily ignore a negative global backdrop. For now, bulls remain clearly in the driver’s seat, and according to the forecast, the coming earnings season should be one to remember. Stay tuned!