Wall Street experienced a quiet week of trading, as investors were waiting for the Fed’s annual Jackson Hole symposium. (There are also very few economic releases coming out before the end of the summer season.) The much-awaited meeting didn’t change the underlying trends in the market, with no major shifts in the central bank’s rhetoric. The hectic correction of the previous two weeks brought the major indices to one-month lows, but Tuesday’s encouraging bounce erased a large part of the losses. The approaching next episode of the debt-ceiling saga and the positive news regarding the planned tax reform put Washington in the spotlight again, as the President’s position still looks vulnerable, posing a risk for equities.
Economic numbers were few and far between last week, and the overall picture was mixed at best, as the housing market provided especially bearish input. New and existing home sales both missed analyst’s estimates by a large margin, as last month’s positive releases seem to have been just a temporary bump in the sector’s negative trend. The most watched durable goods order report was a mixed bag, as the headline number was a sizable negative surprise, but the more important core indicator came in slightly better-than-expected. All in all, the economy is still growing without a doubt, but the numbers are far from stellar, which could affect the Fed’s policies as soon as its September FOMC meeting.
Technicals remained mixed despite the clear improvements, as especially the weakness in small caps remains a significant worry for the Gorilla. The Dow finished the week back above both its 50- and 200-day moving averages, thanks to the bounce while the Nasdaq and the S&P 500 are right at their short-term average. All three of the benchmarks are well above their long-term indicators but the Russell 2000 is still stuck below the measure, and as the 50-day average is turning lower, small caps look more shaky. The Volatility Index (VIX) declined substantially after two weeks of scary spikes, and it’s currently standing at 11.50, after starting last week at 15; signaling a low level of market risk.
Market internals show clear signs of recovery after a period of weakness, and several measures provided bullish signals during last week’s bounce. The Advance/Decline line is positively diverging, as advancing issues outnumbered declining stocks by a 5-to-1 ratio on the NYSE and by a 4-to-1 ratio on the Nasdaq. The average number of new 52-week highs also improved significantly on both exchanges, rising to 82 on the NYSE, and 57 on the Nasdaq. The number of new lows fell off a cliff in the meantime, dropping to 58 on the NYSE, and 64 on the Nasdaq. The ratio of stocks above their 200-day moving average remains the most worrisome market breadth measure, as it is still stuck below 60%, despite the slight improvement to 57% from the previous reading of 55%.
Short interest dropped amid the recovery, but it remains above the recently observed record lows, as the relative weakness in small caps is showing in the numbers. Seritage Growth (SRG) is consolidating its recent lofty gains, but with a short interest of 55%, there is plenty left in the tank for another short squeeze. Duluth Holdings (DLTH) has been showing considerable strength recently after falling by more than 50% this year, and bears might be in for a wild ride, as short interest is still very high at 42%. The leaders of the list with the highest days-to-cover (DTC) ratio continue to outperform the market, with the likes of Iron Mountain (IRM) and Verisign (VRSN) both rallying strongly last week. The stocks sport DTC ratios of 19 and 18 respectively, and IRM managed to close at a 12-month high, while VRSN got close to its all-time high despite the recent correction.
Things are about to get exciting on Wall Street, as the end of the traditionally slow August is near, and given the busy economic calendar. The week will be kicked off by CB Consumer Confidence Index on Tuesday, with the prelim GDP reading coming out Wednesday. Friday could be the most interesting day of the week, as the always crucial government jobs report will be released together with the ISM manufacturing PMI. As the Fed is expected to announce the details of its balance sheet reduction in September, the numbers of the next few weeks should be closely monitored. The debt-ceiling debate is also expected to heat up as the week unfolds, so everything looks to be set for a lively week. Stay tuned!