July 23, 2018

While the headlines were all about the President’s controversial Helsinki meeting with Putin last week, investors were more focused on Fed Chair Jerome Powell’s slightly hawkish testimony and corporate earnings. The major indices had a quiet summer week as far as price action is concerned, although there was considerable excitement on the level of individual stocks. The start of the earnings season was even better than the already lofty estimates, as most of the reporting companies managed to beat expectations, with especially the financial segment providing positive surprises. Citigroup (C), Morgan Stanley (MS), and JP Morgan Chase (JPM) all reported great numbers, and while Wells Fargo (WFC) disappointed, the overall picture was positive in this key and recently battered segment.

Domestic economic releases were a mixed bag last week, but thanks to the recent trade skirmish, China stole the show, as the weak numbers coming out from the country together with a collapsing currency cast a shadow on global growth. The most-awaited retail sales report came in slightly better-than-expected, while the May figures were revised substantially higher, giving an early boost to Treasury yields. The Philly Fed Index and weekly jobless claims also made the Gorilla smile, with the latter measure hitting a 50-year low. The housing market suffered a hit in June, with both housing starts and building permits falling off a cliff. Donald Trump gave a bombshell interview on Thursday, directly criticizing the Fed regarding rising interest rates, while also pointing out the alleged Chinese currency manipulation, causing turmoil in the bond market.

The technical picture is still overwhelmingly bullish, despite the mixed price action, as the major indices are in clearly rising trends. The S&P 500 hit a 4-month high last week, while even the still lagging Dow edged closer to its all-time high. The Nasdaq continues to lead the way higher and all of the three benchmarks are above their 50- and 200-day moving averages, confirming the underlying trend. The Russell 2000 has now been showing relative weakness for the second week in a row, but the Gorilla thinks that small caps might just be taking a breather after their stellar run, as the index is also still above both moving averages after the pullback. The Volatility Index (VIX) reflected the quiet environment, as the current historically low 13 level continues to support the bullish case.

Market internals remained mixed, as the relative weakness of small caps continued to weigh on some of the most reliable measures, even though the divergences are not strong enough to ring the alarm bell. The Advance/Decline line is still below its previous high, lagging the Nasdaq, but advancing stocks outnumbered declining issues again, by a 2-to-1 ratio on the NYSE and by a 3-to-1 ratio on the Nasdaq. The average number of new 52-week highs declined on both exchanges, falling to 71 on the NYSE, and 104 on the Nasdaq. The number of new lows was virtually unchanged in the meantime, edging lower to 48 on the NYSE, and 47 on the Nasdaq. The low percentage of stocks above their 200-day moving average is still somewhat worrisome, as the measure closed the week near 52% again, with several segments still not joining the rally.

The most shorted issues performed in-line with the broader market last week, as the previous widespread short squeeze fizzled out, but short interest remains at a very low level thanks to the record-long bull market. Duluth Holdings (DLTH) edged closer to its recent 18-month high, and since short interest is still at 52%, a breakout could be just around the corner. Another week, another all-time high for Transdigm (TDG), and as the days-to-cover (DTC) even ticked higher to 13, shorts will find it very hard to avoid the juggernaut. Snap-On (SNA) had a very volatile week, as it reported on Thursday, but it finished with a sizable gain that could be the start of a bull run, given its DTC ratio of 12.

The earnings season will be at full speed this week, with more than $2 trillion of market cap reporting, including the likes of Amazon (AMZN), Alphabet (GOOG), Facebook (FB), and Exxon (XOM). Besides that, all eyes will be on the European Central Bank. It is set to follow the Fed on its monetary tightening path, and investors will be eager to hear the details of the, so far, vague schedule. While no rate hike is expected from the bank on Thursday, that day could see the most activity on Wall Street, as the durable goods report will also be released. Before that, existing home sales will come out on Monday, while the advance GDP print will close the week on Friday. As always, earnings might spark wild day-to-day moves, which could be exaggerated in the low-volume summer environment, but the Gorilla thinks that bulls still have the upper hand, and July could very well end on a bullish note. Stay tuned!