It was a memorable week for investors without a doubt, as the major indices outright crashed on Monday, due to a vicious cycle of surging volatility and declining stocks. The Dow, the Nasdaq, and the S&P 500 all entered correction territory, dropping by more than 10% from their recent record highs, the deepest pullback in 2 years. Although analysts noted that the reason behind the crash was the implosion of several short-volatility funds, selling continued in a more orderly fashion throughout the week, as the market “digested” the sudden drop. That said, volatility is still way above the levels seen in recent years, and the Gorilla hopes that as the storm passes, the 9-year bull market will resume.
Economic numbers took a backseat amid the turmoil, especially since the ISM non-manufacturing index was the only closely-watched domestic indicator released last week. The services sector showed very strong momentum again, as the index printed much higher than expected, signaling robust expansion. On another bullish note, new jobless claims edged lower to 221,000, just slightly above the multi-year lows from last October. The positive readings were mostly ignored by investors, as all eyes were on Treasury yields, which triggered the plunge in the first place. Although yields turned volatile together with stocks, they are still very close to their highest levels in years, thanks in part to the hawkish words of Fed President Kaplan last week.
The technical picture turned didn’t turn upside down despite the huge moves in the major indices, which erased around three months worth of gains in a matter of days. The extent of the preceding rally is well-described by the fact that the benchmarks only penetrated their rising 50-day moving averages, while they remained above their rising 200-day averages. Small caps continued to lag the broader market, just as they did during the weeks leading up to the crash. The Russell 2000 fell below its long-term average, although it managed to close the week above this key indicator. The Volatility Index (VIX) was the center of attention all week long, as the measure briefly exploded above the 50 level from as low as 9 earlier in the year, before closing near 30 on Friday.
Market internals collapsed in line with the incredible price action, and, for now, the most reliable measures are pointing to the continuation of the correction. The Advance/Decline line fell to levels not seen since November, pushed lower by the widespread plunge, as declining issues outnumbered advancing stocks by a 6-to-1 ratio on the NYSE and by a 5-to-1 ratio on the Nasdaq. The average number of new 52-week highs continued to fall sharply on both exchanges, plunging to 36 on the NYSE, and 26 on the Nasdaq. The number of new lows surged higher in the meantime, rising to 126 on the NYSE, and 182 on the Nasdaq. The percentage of stocks above their 200-day moving average fell as low as 45%, below the key 50% level, as a majority of stocks are now in declining trends according to the measure.
Short interest continued to rise from its historic lows on Wall Street, as bears finally had their moment in the sun after such a long period of relentlessly climbing prices. Seaworld Entertainment (SEAS) managed to stay in the green in the “sea of red,” probably helped in part by short-covering, as short interest still stands at 43%. Dillard’s (DDS) also defied gravity amid the selloff following two negative weeks, and the short interest of 47% suggests that the relative strength of the stock could prove persistent. Although C.H. Robinson (CHRW) finished slightly lower last week, the performance of the stock is still admirable, and the outlook remains positive, given its days-to-cover (DTC) ratio of 12.
Although the economic calendar will be much more packed, it seems unlikely that investors will pay too much attention to fundamental data should volatility remain as high as it did last week. With technical levels and structural issues being in focus, the Gorilla thinks that it could be a “traders market” for another week or two until the dust settles. That said, the key retail sales and CPI reports are both scheduled for Wednesday, while the PPI index, the Philly Fed Index, industrial production will all come out on Thursday, and building permits and housing starts will be released on Friday. While the market hasn’t looked so fragile in recent memory, Friday’s late-day rally, and the underlying strength in fundamentals, make the Gorilla confident that the bull market is well and alive. Stay tuned for a crucial week on Wall Street!