May 7, 2018

The emotional roller coaster of the earnings season dominated Wall Street last week, with the Fed’s rate decision and a slew of economic indicators thrown into the mix as well. The result was another choppy and flat week, as the major indices finished virtually unchanged, despite the wild swing in both directions. The dollar and Treasuries were the centers of attention throughout the eventful week, and the Dollar Index hit a 4-month high, which contributed to the relative weakness among domestic equities amid the global risk rally. As for earnings, growth has been spectacular, as companies increased their bottom line by almost 30% quarter-to-quarter, with the help of the tax cuts by the Trump-administration.

The Fed didn’t raise its benchmark interest rate this time around, despite mixed market expectations, and analysts evaluated the Central Bank’s statement as slightly dovish too. While the cautious Fed helped stocks initially, the strongest rally of the week came on the heels of the worse-than-expected government jobs report on Friday. The headline non-farm payrolls number wasn’t far below the consensus estimate, but the much lower-than-expected wage growth figure was likely behind the jump in equities, as inflationary fears eased substantially. Before Jobs Friday, the ISM manufacturing and non-manufacturing PMIs both provided negative surprises, triggering a pullback in Treasury yields, just as the widely watched 10-year yield was about to cross 3%.

The technical picture remains mixed, as although the long-term indicators still clearly point to a bullish trend, the short-term picture is neutral, at best. The major indices are trading close to their 50- and 200-day moving averages, which are converging thanks to the now 3-month long correction, and the tug-of-war between bulls and bears continues. On a positive note, small caps once again showed relative strength compared to the broader market in the second half of the week, as the Russell 2000 closed above its rising 50-day moving average, not far from its all-time high. The Volatility Index (VIX) was little changed in the choppy environment, as it remains well below the danger zone, closing near 16 after the Friday rally.

Market internals are still not signaling major troubles ahead, although some of the measures could be in better shape, as the strength in small caps helped another uptick in the most reliable indicators. The Advance/Decline line continues to outperform the major indices, as it finished higher again. Advancing stocks outnumbered declining issues by a 3-to-1 ratio on the NYSE and by a 4-to-1 ratio on the Nasdaq. The average number of new 52-week highs was stable again on both exchanges, rising to 62 on the NYSE, and 67 on the Nasdaq. The number of new lows declined in the meantime, falling to 80 on the NYSE, and 63 on the Nasdaq. The percentage of stocks above their 200-day moving average stands right at 50%, as the most bearish indicator deteriorated a bit more last week.

Short interest was mostly influenced by the earnings releases for another week, as overall, the market was remarkably stable, despite the turmoil of recent months. Shake Shack (SHAK) added another 20% to its gains of the past two months after its quarterly report, and with short interest still being close to 40%, bears could be in trouble in the coming weeks. RH Corp. (RH) delivered on its promise last week, as the stock made its move after a month of consolidation, getting close to its all-time high, despite its short interest of 38%. Extra Space (EXR) also continued higher in the neutral environment, as the stock is now just a hair below its record high, while sporting a promisingly high days-to-cover ratio of 12.

Inflation will be in the spotlight this week, as the economic calendar will be a lot less busy than it has been of late. However, both the Producer Price Index (PPI) and Consumer Price Index (CPI) will be released on Wednesday and Thursday, respectively. As the rise in Treasury yields has been the most important trend of the year so far, a significant surprise in the PPI, and even more in the CPI, could move all financial markets. Central bankers will be back in action too, with speeches by Jerome Powell and Mario Draghi on Tuesday and Friday, and the Bank of England’s crucial rate decision on Thursday. With still no clear short-term technical signals present, the Gorilla remains focused on the big picture -record earnings, modest economic growth, and the underlying bullish trend, and with all those in mind, bulls should remain confident. Stay tuned!