Stocks failed to maintain the momentum of the previous weeks, as the market-leading Nasdaq pulled back from its fresh all-time high after a bullish Monday. The other major indices also remained well below their respective record highs. In fact, all of the major benchmarks closed the week in the red, as small caps closely followed the broader market during the dip as well. The week was full of controversial political developments, with Trump’s purge in the White House and the diplomatic crisis between the UK and Russia making headlines and causing some uncertainty in financial markets. Trading volume declined towards the end of the week, as some players already took a step back before the looming Fed meeting scheduled for this Wednesday.
Last week was a data-heavy week, with the highly anticipated CPI Index thrown in the mix, but at the end, the inflation report didn’t have a large impact on prices, as it was in-line with the consensus estimate. That said, the sizable miss in retail sales, coupled with the surprisingly high PPI, accelerated the slide on Wednesday, as equities gave back all of their post-job report gains. The other indicators were mixed, with the housing market sending negative signals, as building permits and housing starts both came in below expectations. On a positive side, industrial production surged unexpectedly to a 7-year high, with the help of the oil & gas and the mining segments, while the UofM Consumer Sentiment Index also beat the consensus and rose to a record high.
The technical picture is a tad worse than it was a week ago, as the broad pullback pushed the major indices back toward their 50-day moving averages, following the strong bounce of the previous week. The relatively strong Nasdaq is still clearly above its key indicator, while the S&P 500 is also a hair north of its, but the Dow, which has been lagging the other benchmarks lately, finished below its short-term measure. The rising 200-day moving averages remain much lower with all three of the major indices, as well as the Russell 2000, although the relative strength of small caps vanished last week. The Volatility Index (VIX) ticked higher mid-week, topping the 17 level, but as markets settled down, the fear index fell back to 15 on Friday.
Market internals continued to change in-line with price action on Wall Street, as the most reliable measures all deteriorated in the slightly bearish environment. The Advance/Decline line is still not a cause for concern, being just below its January high, even as declining issues outnumbered advancing stocks by a 3-to-2 ratio on the NYSE and by a 4-to-3 ratio on the Nasdaq. The average number of new 52-week highs declined on both exchanges, falling to 80 on the NYSE, and 141 on the Nasdaq. The number of new lows rose a bit in the meantime, climbing to 80 on the NYSE, and to 35 on the Nasdaq. The percentage of stocks above their 200-day moving average edged lower, but the 57% reading is still encouraging, as it is much higher than the levels seen after the mini-crash in February.
The most shorted issues performed similarly to the broader market after one of the strongest short squeezes of recent memory, as the dip in stocks eased the pain of bears who got caught cold feet by the furious rally. That said, Match Group (MTCH) continued to deliver for bulls, finishing the week at yet another new all-time high, despite its short interest of 56%. Auto dealership Carvana (CVNA) staged a strong recovery from its recent low, adding more than 15% in one week, and with short interest standing at 50%, there could be more in the tank. Although Verisign (VRSN) fell one spot off the top of the list of those with the highest days-to-cover (DTC) ratios, bears cannot be too happy, as the stock broke out to a new record high, and the reading of 15 is still sky high.
All eyes are now on the Fed and its new Chair Jerome Powell, as the widespread consensus is that the Central Bank will raise the benchmark interest rate by another 0.25% amid returning inflation worries. The monetary statement is another deal, as analysts are divided regarding the number of tightening steps that the Fed will take later this year, and any strong hint on that could spark volatility in stocks and bonds alike. Treasury yields are close to their multi-year highs, especially on the short end of the curve, which already contributed to the correction in equities, and another surge in rates could be something to keep an eye on. The increasing trade war chatter has also been weighing on sentiment, but the Gorilla hopes that we won’t see an escalation on that front, as barring a negative catalyst, the bull market seems to be on the right track. Stay tuned!