June 18, 2018

Wall Street saw one of the busiest weeks in recent memory, with crucial economic indicators, central bank meetings, and the historic Kim Dong Un-Trump summit all being on the “menu.” Despite the loaded schedule, volatility remained fairly low throughout the week, even taking Friday’s hectic session into account. The Fed delivered the second rate hike of the year, in line with the consensus on the Street, but the guidance of the Central Bank was slightly more hawkish than expected. The statement, and the generally bullish economic numbers, pushed short-term Treasury yields higher, while the major stock indices continued to diverge substantially. The Nasdaq hit a new all-time high yet again, and finished the week near its record levels, while the Dow and the S&P 500 were virtually unchanged.


There were plenty of key economic releases coming out last week, even as the Fed and the European Central Bank stole the show. While the Fed continued its tightening cycle, the ECB confirmed that it would not raise its benchmark rate until next summer, although the bank pledged to end its quantitative easing program by the end of the year. As for the real economy, almost all of the key indicators beat expectations, especially the blowout retail sales report, making the Gorilla smile. Consumer sentiment also ticked higher, and although industrial production was slightly below the consensus estimate, the CPI and PPI reports both pointed to healthy growth, as inflation picked up across the board.


Although the major indices have been mixed recently, the technical picture continues to be clearly positive, with even the relatively weaker segments of the market being in advancing trends. The Nasdaq is without a doubt the leader of the bull market, with the tech benchmark hitting record highs consistently, but the Dow and the S&P 500 are also trading above both their 50- and 200-day moving averages. The Russell 2000 is following the Nasdaq closely, as small caps are also in a bullish spell, as the index closed at its fresh all-time high on Friday. The Volatility Index (VIX) stayed in a narrow range all week long, and it is still just above the widely watched 10 mark; historically low levels, signaling optimism among investors.


Market internals were stable despite the mixed price action, as the relative strength of small caps continues to help the most reliable measures. The Advance/Decline line pulled back slightly in the second half of the week after hitting another new high, as advancing stocks outnumbered declining issues by a 3-to-1 ratio on the NYSE and by a 5-to-1 ratio on the Nasdaq. The average number of new 52-week highs declined on both exchanges, falling to 116 on the NYSE, and 196 on the Nasdaq. The number of new lows was also lower, declining to 42 on the NYSE, and 33 on the Nasdaq. The percentage of stocks above their 200-day moving average was unchanged in the calm environment, closing the week at 56% again, staying below the key 60% level.


The most shorted stocks continued to outperform the broader market, as has been the case for several weeks now, and the widespread short squeeze caused severe pain for bears in some cases. Duluth Holdings (DLTH) gained almost 15% last week, and after a subpar year so far, the stock might be ready to pop, with short interest standing at 48%. iRobot (IRBT) spiked higher again, as the stock is now up by 30% this month, with short interest still at 44%. Mattel (MAT) is also having a spectacular June, advancing by 15% in the past two weeks, and since the stock sports a days-to-cover (DTC) ratio of 12, the short squeeze could continue in the coming weeks.


Investors might take a much-needed breather this week, while enjoying the soccer World Cup, as the economic calendar is nowhere near as busy as last week’s. The only major geopolitical event will be the OPEC’s meeting on Thursday. The energy segment might see some volatility during the summit, as the cartel will decide on its controversial output levels, especially after the recent plunge in the price of crude. The Philly Fed index will be released on Thursday, while the housing market will be in focus on Tuesday, with the release of building permits and housing starts. The Gorilla thinks that the economy is still clearly strong, the bull market is well and alive, and as investors just weathered a deep correction, this summer could turn out to be a positive surprise. Stay tuned!