Stocks had a decisively bearish week, as the Nasdaq-led rally that followed the February mini-crash ran out of steam and the major indices rolled over. Although all eyes were on the Fed and Jerome Powell, who took the first tightening step of his tenure, the escalation of Trump’s trade war was the real catalyst for the bearish move. The POTUS announced a tariff plan targeted directly at China, and that weighed heavily on the already fragile market in the last half of the week. The broad decline carried the Dow and the S&P 500 below key technical levels, with correction lows suddenly back in focus again. The weaker benchmarks are now in the red year-to-date, and the tech index also gave back most of its 2018 gains, despite trading at an all-time high less than two weeks ago.
Apart from the Fed’s rate decision, last week wasn’t particularly busy regarding economic releases, with only durable goods orders and existing home sales coming out. Both reports were better-than-expected, and given the recent plunge in activity, the housing market’s strength is a much-welcomed development. Manufacturing has shown robust growth recently, and the healthy trend in new orders suggests that the sector could be in for further improvements. The hectic price action in Treasuries reflected the mixed signals sent by the Fed and its new chair, as most analysts interpreted the monetary statement as slightly hawkish. Yields pulled back across the curve afterward, especially in the case of long-term bonds.
The steep decline delivered a huge blow to bulls, as the technical picture deteriorated substantially, with the major indices all dipping below key indicators and support levels. The Dow, the S&P 500, and the Nasdaq are now between their slightly declining 50-day moving averages and their still rising 200-day moving averages, indicating a bearish short-term and a bullish underlying trend. Although small caps showed relative strength throughout the week, the Russell 2000 followed the broader market lower after the Fed meeting, also dipping below its short-term moving average. The Volatility Index (VIX) surged past 20 and topped 25 amid the late-week rout, and although the February high is far away, the fear index is now back in the danger zone for bulls.
Market internals reflected the broad-based correction, but there were minor positive divergences in some of the most reliable measures, with the help of the relative strength in small caps. The Advance/Decline line outperformed the major indices and held up well above the March lows, although declining issues outnumbered advancing stocks by a 5-to-2 ratio on the NYSE and by a 3-to-1 ratio on the Nasdaq. The average number of new 52-week highs declined sharply on both exchanges, falling to 37 on the NYSE, and 69 on the Nasdaq. The number of new lows spiked higher, rising to 140 on the NYSE, and 69 on the Nasdaq. The percentage of stocks above their 200-day moving average took a nosedive, and fell back below the 50% level, closing the week at the very low 43%.
After a great period for the most-shorted stocks, last week’s dip put pressure on bulls, as bears increased their bets and pushed prices lower across the board. Despite that, there were several stocks showing signs of strength. Carvana (CVNA) managed to edge higher, defying the broad market and its short interest of 49%. Diamond Offshore (DO), the leader on the list with the highest days-to-cover (DTC) ratios with a reading of 25, also finished in the green, while hitting a seven-week high. With National Oilwell (NOV) sporting a DTC ratio of 10, and the stock jumping by more than 5% last week, helped by the rising price of oil, the Gorilla wouldn’t be surprised to see the continuation of the positive trend.
This holiday-shortened week could still be about the ongoing back and forth tariff announcements with China, but hopes are that we won’t see any further escalation, like other countries joining the “party,” as that could create a hostile environment for stocks. That said, the most important fundamentals are solid, and in hindsight, the ongoing selloff might be remembered simply as a great buying opportunity. As for economic releases, the CB Consumer Confidence Index will be released on Tuesday, pending home sales and the final GDP print is scheduled for Wednesday release, while personal spending and the Chicago PMI will highlight Thursday’s session. While the bull market is facing its toughest test in quite a while, and short-term technicals being bearish, the Gorilla hopes that the positive long-term trend soon overpowers the correction. Stay tuned!