The major indices had a shaky Independence Day week following a volatile period, as the Nasdaq and the tech giants remained the center of attention. Before the week’s most awaited release, the government jobs report, the sentiment leaned on the bearish side. However, the mixed labor market numbers cleared the way for a healthy bounce on Friday. That said, the technology benchmark is not out of the woods just yet, and all in all, the market is in correction mode following the grinding rally that lacked real momentum. The Gorilla still thinks that these normal pullbacks are not bad for bulls, as they provide a solid base for further gains in the coming months.
Going into the details of the government jobs report, we see that wage growth disappointed once again, which could lead to further weakness in the CPI index and retail sales. Consumers are likely to save more, as they have been doing in recent months, pushing the savings rate to a new 7-year high. We don’t know if that will be enough to halt or slow down the tightening cycle of the Fed, but the minutes from the FOMC’s last meeting did reflect concern regarding growth. On a positive note, the ISM manufacturing and non-manufacturing PMIs both surprised to the upside, while still displaying healthy readings. The strong rise in yields continued in the bond market, as the recent hawkish shift in the ECB’s policies convinced investors that the Fed would go through with its planned rate hikes.
The technical picture deteriorated somewhat thanks to the recent correction, especially in the tech segment, but the long-term trends are unharmed, and the major indices are still very close to their all-time highs. The S&P 500 and the Nasdaq dipped below their 50-day moving averages last week, while the Dow remained above its short-term measure. All three of the benchmarks still being well clear of their long-term moving averages. Small caps slightly lagged the broader market throughout the week, but the Russell 2000 surged higher on Friday, and closed above both its 50- and 200-day moving averages after the move. The Volatility Index (VIX) spiked higher but finished unchanged yet again, as bulls stepped in to buy the dip and pushed the “Fear Index” back down to around the 11 level.
Market internals are showing the effects of the broad correction, as all of the key measures ticked lower, but the Gorilla doesn’t see any reason to panic. The Advance/Decline line, for example, is still very close to its recent highs, despite drifting lower last week, as advancing issues outnumbered declining stocks, by a 3-to-2 ratio on the NYSE and by a 2-to-1 ratio on the Nasdaq. The average number of new 52-week highs declined again on both exchanges, dropping to 73 on the NYSE, and 60 on the Nasdaq. The number of new lows almost doubled amid the correction, rising to 32 on the NYSE, and 39 on the Nasdaq. The ratio of stocks above their 200-day moving average got close to 60% during the week but finished near 63%, which is still well below the number that the Gorilla likes to see in a bull market.
Stocks saw an increase in short activity, as some of the major banks issued valuation warnings recently, but the overall level of short interest remains near historic lows, still with the exception of the battered energy segment. Real estate developer LGI Homes (LGIH) jumped by 10% last week, and it’s up by 30% since May, while short interest still stands at 44%. Avis (CAR) is also looking strong after its recent surge, and with the short interest at 42%, bears might be in for more trouble soon. Verisign (VRSN), the leader of the list with the highest days-to-cover (DTC) ratio with a reading of 18, remained strong in the face of the correction, hitting a new all-time high yet again. Expeditors International (EXPD) also held up well and shows encouraging strength, and that could be scary for shorts, given the current DTC ratio of 11.
The Gorilla’s suspicious feeling turned out to be correct regarding last week, but as the current correction unfolds, more and more opportunities will likely pop up on the Bulls’ radar. The economic calendar will be empty until Thursday’s PPI index, while Friday’s CPI and retail sales reports could cause fireworks once again, especially if the recent weakness continues in the consumer segment. Before the releases, Fed Chair Janet Yellen will testify in Washington, and although the Central Bank’s position seemed firm lately, even a small change in the rhetoric of Mrs. Yellen will likely lead to turmoil in bonds, stocks, and currencies alike. With that in mind, stay tuned for a tricky week on Wall Street!