May 29, 2018

Judging by the headlines, financial markets should be in trouble, as the deep crisis in Brazil, the collapsing Turkish currency, and the shocking new government of Italy all provided plenty of fear-mongering material last week. Despite the negative news flow, the major indices traded in a narrow range after the strong run-up of the previous weeks, and the Nasdaq, which has been leading the way higher recently, actually closed in the green. Small caps pulled back somewhat after hitting new all-time highs as measured by the Russell 2000, but the key segment continues to show that the bull is far from dead. Donald Trump also caused some turmoil when he canceled his historic meeting with North Korean leader Kim Dong Un, but the Gorilla would be surprised if this would be the last turn of events in this story, and the market’s reaction was also muted.

The release of the minutes from the latest Fed meeting was the most awaited event of the week, and the Central Bank delivered what dollar shorts were hoping for; a slightly dovish shift. Jerome Powell and the FOMC seem to be ready to let inflation run higher than their 2% target, albeit temporarily, in order to avoid a “policy error” that so many analysts fear. The recently surging Treasury yields fell substantially in the latter half of the week, with short- and long-dated bonds rallying together, hitting levels not seen in weeks or even months. The few economic releases that came out were leaning bearish, as existing home sales were hit hard by rising rates in May, while durable goods orders also fell more than expected.

The technical picture was little changed as stocks drifted sideways, as the wound that the 3-month long correction caused healed further. The S&P 500, the Dow, and the Nasdaq are still above their 50- and 200-day moving averages, and the short-term indicators continued to turn higher. With the Russell 2000 consolidating above its January high, it’s no surprise that the small-cap index is in the best technical position, with both moving averages clearly rising thanks to its strong advancing trend. The Volatility Index (VIX) is confirming the bull market as well, as the fear measure is relentlessly drifting lower, closing the week near 13, after hitting the lowest level since the mini-crash in February.

As bulls take a breather after the strong Nasdaq-led rally, market internals are also less bullish than in recent weeks, although the most reliable measures continue to please the Gorilla. The Advance/Decline line was flat last week after a month of gains, even as advancing stocks outnumbered declining issues by a 3-to-2 ratio on the NYSE and by a 3-to-1 ratio on the Nasdaq. The average number of new 52-week highs was lower again on both exchanges, falling to 97 on the NYSE, and 130 on the Nasdaq. The number of new lows also declined, dipping to 46 on the NYSE, and 39 on the Nasdaq. The neutral price action left the percentage of stocks above their 200-day moving average unchanged at 54%, and the Gorilla would be happy to see some improvement in this lagging measure soon.

The most shorted issues continued to perform better than the market average, as bears reduced their positions further in the light of the blowout earnings season and the improving technicals. Match Group (MTCH) is now up by 20% from its low hit in early May, and the recovery might continue in earnest, fueled by its very high short interest of 52%. Seaworld (SEAS) is on the move again after an orderly correction, and with short interest still standing at 38%, the stock could be in for an interesting June. Extra Space (EXR) is trading just a hair below its all-time high following a bullish week, and should the stock break out to new highs, the short squeeze could accelerate, as its days-to-cover (DTC) ratio is showing a reading of 13.

Traders are in for a short, but possibly spectacular week, as there will be key reports released every day. The holiday-shortened week will kick off with the CB Consumer Confidence Index on Tuesday, while the preliminary GDP report will be released on Wednesday. The Chicago PMI and personal spending are scheduled for Thursday, and the week will finish with a bang, as the ISM manufacturing PMI and the government jobs report will both come out on Friday. While seasonality will remain hostile in June, that didn’t stop the rally in May, and the Gorilla thinks that it won’t be a big issue going forward either, as enough energy built up during the recent deep correction to fuel the bull. Stay tuned for an eventful week!