The major stock indices continued to trade in a very narrow range for the majority of the past week, before fading slightly towards the end of the week, and finishing off on a negative note. The main event of the week turned out to be Janet Yellen’s speech at the Jackson Hole symposium, which might have serious consequences for the coming weeks or even months. Jackson Hole was the place where Ben Bernanke first announced the decision to implement “unconventional measures” to prop up the economy, and now the current Fed chair hinted on a “stronger case for a rate hike” at the same event.
The bond market’s reaction to the ‘hawkish” words was mixed, as the 2-year yield jumped to a two-month high, but the “longer-end” of the yield curve remained close to record lows. This could mean that investors don’t believe that the Fed will be able to maintain higher interest rates for long, pointing to a persistent long-term pessimism regarding the economy. Traders also got to weigh the prelim GDP growth number on Friday, but the market barely budged following the release, as the 1.1% reading was perfectly in line with expectations. The Gorilla thinks that bulls should be delighted with the situation, as the “wall of worry” is still present, while the numbers still show that the economy continues to grow at a modest pace.
The technical picture deteriorated somewhat following an extended period of undoubted bullishness, as large-cap stocks led the way lower in the second half of the week. All of the major indices fell below their flat 50-day moving averages, and the Dow even finished below its still rising 200-day moving average, signaling a correction. The S&P 500 and the Nasdaq, on the other hand, are still above their respective long-term averages. On a positive note, the Russell 2000 closed right at the 50-day moving average, way above the 200-day average, clearly outperforming the large-cap benchmarks. The Volatility Index (VIX) rose above 14 on Friday, following the least volatile 30-day period since 1995, but the closing reading is still well below the “danger zone.”
Market internals are still encouraging, despite the slight correction, as the relative strength of small caps continues to make the Gorilla smile. The Advance/Decline line rose to a new all-time high yet again, as advancing stocks slightly outnumbered declining issues, by a 2-to-1 ratio on the NYSE and by a 3-to-2 ratio on the Nasdaq. The number of new 52-week highs rose slightly on both exchanges, to 155 on the NYSE and to 137 on the Nasdaq, as the number of new lows was stable at 10 on the NYSE and at 26 on the Nasdaq. The ratio of stocks above their 200-day moving average rose to another 3-year high above 76% on Thursday, but it finished the week below 75% after the reversal on Friday.
Short interest continued to trend lower on the list of the most shorted stocks on the NYSE and the Nasdaq, despite the current correction. Battered emergency room operator Adeptus (ADPT) is slowly climbing higher on the list, currently in second place, with a short-interest of 58%. Telehealth services provider Teladoc (TDOC) is in a top position, with a short interest of 49%, although the stock rallied by more than 50% so far this year. The day-to-cover ratio (DTC) of Marriott (MAR) continued to rise, hitting 25 last week, despite the hotel chain being close to its all-time high. The situation in Grainger (GWW) is also promising for bulls, as the DTC ratio climbed to 21, while the stock of the wholesaler continued to drift higher.
The Gorilla thinks that traders might be in for a very interesting week before the long Labor Day weekend, as the current correction unfolds on Wall Street. The underlying trend remains positive, and the non-farm payroll number on Friday might give another boost to stocks, as it did previously. The shift in expectations regarding the Fed’s interest rate policy could cause more short-term volatility, but the Gorilla thinks that in the long run, the normalization of rates would be a welcomed sign. The Consumer Confidence Index on Tuesday and the ISM Manufacturing Index on Thursday will also be closely watched by investors, so stay tuned for an action-packed week!