July 30, 2018

The major indices had a mixed week, although bulls were glad to see the Dow and the S&P 500 finally fully recover from the February mini-crash. The Nasdaq and small caps lagged behind for the second week in a row. The major indices had a mixed week, as although bulls were glad to see that Dow and the S&P 500 finally fully recover from the February mini-crash, the Nasdaq and small caps lagged behind for the second week in a row. The Gorilla wasn’t surprised to see the quick changes in investor sentiment, as the summer earnings season is usually even more unpredictable thanks to the relatively scarce liquidity. Generally speaking, earnings were very strong, but Facebook’s (FB) record-breaking $120 billion market cap loss spooked investors on Wednesday, as the health of the tech giants, especially the FAANG stocks, is vital for Wall Street. The trade war saga saw a surprising, but much-welcomed plot twist, as Donald Trump and European Commission chief Juncker struck a deal, taking a huge step away from an all-out global war.


While only a few key economic releases came out last week, the bond market showed a clear trend, with rising rates across the yield curve. The President’s harsh words with regard to the Fed’s tightening policy didn’t change the trend, although the flattening of the curve paused briefly. The most-awaited durable goods report was in line with expectations, still showing healthy expansion, and the advance GDP print came in at 4.1%; the highest since 2010. While the headline number was great, it just missed the consensus estimate, and the slightly higher than expected price index also sparked some concerns. Weekly jobless claims continue to point to a tightening job market, and although that hasn’t translated into rising inflation yet, the Fed will surely keep a close eye out in the coming months.


The technical picture remains bullish despite the mixed price action, even though some cracks appeared on the surface of the rally. The major indices are still in clearly advancing trends, being above both their 50- and 200-day moving averages, and the Dow and the S&P 500 hit new 4-month highs. That said, the Nasdaq got closer to the short-term average despite hitting another new all-time high on Wednesday, and small caps are also showing signs of weakness. The Russell 2000 touched its 50-day moving average on Friday, and the benchmark finished the week deep in the red. The Volatility Index (VIX) remained low despite earnings season, and it closed the week near 14, as investors are still confident that the bullish trend will resume even if a correction is just ahead.


Market internals are reflecting the recent relative weakness in small caps and tech issues, but the Gorilla thinks that the underlying trend is still not in danger, despite the divergences. The Advance/Decline line continued to drift sideways after its spectacular run, even as advancing stocks outnumbered declining issues again, by a 3-to-1 ratio on the NYSE and by a 3-to-2 ratio on the Nasdaq. The average number of new 52-week highs increased on both exchanges, rising to 93 on the NYSE, and 105 on the Nasdaq. The number of new lows was stable in the meantime, ticking lower to 40 on the NYSE, but rising to 63 on the Nasdaq. The percentage of stocks above their 200-day moving average declined to 51% after Friday’s post-GDP plunge, as the measure continues to show weak participation in the rally.


The most shorted issues slightly underperformed the market average as risk appetite declined toward the end of the week, but overall, short interest remains very low, and bulls are still clearly in control on Wall Street. iRobot (IRBT) spiked to a new 4-month high after publishing its quarterly numbers, and although the stock pulled back afterward, bears could have more trouble ahead, given its short interest of 42%. Shorts of Transdigm (TDG) are still under strong pressure too, as the stock surged to yet another all-time high last week, while the days-to-cover (DTC) is unchanged at 13. Diamond Offshore (DO) sports an even higher DTC ratio of 17, and although the stock hasn’t gone anywhere since April, last week’s rally could be the start of something bigger.


August will kick off with a very busy week for traders, mostly because of a government jobs report and central bank meetings, but some key earnings will also be coming out. Apple (AAPL) and Berkshire (BRKA) are the highlights of the earnings week and, with “only” $60 billion missing, the big question is whether or not Apple could finally become the first $1 trillion company. The Fed, the Bank of Japan, and the Bank of England will all hold meetings this week, and that could mean a roller coaster ride for currencies and equities alike, even as only the BOE is expected to hike rates this time. With the recent mixed price action in mind, the Gorilla thinks that another choppy, hard-to-trade week might be ahead, so fasten your seatbelts, and keep in mind that the trend is still your friend. Stay tuned!