It took only a few hours for the price action to change dramatically on Wall Street, as the previously leading tech giants turned sharply lower in another “flash-crash-like” move that left investors wondering about the fragility of the market. The Nasdaq had a volatile week after the strong move, while the Dow and the S&P 500 outperformed the tech benchmark. The weakness didn’t “infect” the broader market, for now. The other major push came from the Federal Reserve, as the Central Bank delivered the 0.25% interest rate hike that analysts had widely expected. Janet Yellen also announced the gradual reduction of the extraordinary balance sheet of the Fed, which grew exponentially in the aftermath of the financial crisis.
Most analysts expected a dovish statement by the Fed, especially after the much worse-than-expected retail sales and CPI reports. They confirmed the recent weakness in the consumer segment just before the FOMC’s announcement. Surprisingly, the committee only reiterated that it would keep an eye on inflation trends, and although the “tapering” of the Treasury reinvestments turned out to be slower-than-expected, the market’s reaction was mixed at best. Economic numbers were on the bearish side once again, with building permits, housing starts, the U of M Consumer Sentiment Index, and industrial production all came in way below expectations. The Philly Fed Index was the only major bright spot. Sure enough, long-term yields ended the week lower, as the economic outlook got bleaker.
Technicals are still generally bullish, although the relative strength in small caps was short-lived and the Nasdaq went from leader to laggard in a blink of an eye. That said, all three of the major indices are still above both their 50- and 200-day moving averages, even as the technology benchmark got very close to the short-term indicator last week. The Russell 2000 also pulled back sharply after finally hitting a new all-time high, and the lack of follow through might be a major red flag for bulls. The Volatility Index (VIX) experienced a roller-coaster ride without clear direction during the hectic week, and it finished the period right where it started; near the 11 level.
Market internals are sending mixed signals yet again, as some of the key measures got hit hard thanks to the weakness in the Nasdaq and small caps. The Advance/Decline line is still showing strength, hitting new highs despite the mixed price action. Advancing issues outnumbered declining stocks by a 3-to-1 ratio on the NYSE and by a 3-to-2 ratio on the Nasdaq. The average number of new 52-week highs declined further on both exchanges, falling to 123 on the NYSE, and plunging to 99 on the Nasdaq. The number of new lows remained stable, as it edged lower to 43 on the NYSE, and 51 on the Nasdaq. The ratio of stocks above their 200-day moving average turned lower again, finishing the period near 63%, dragged lower by the weakness in small caps.
Short interest remained very low, although it did move slightly from the historic lows of the previous period. RH (RH) rallied another 10% during the week, and while short interest fell significantly to 42%, there is still more than enough fuel left for the squeeze to continue. Spark Energy (SPKE) defied gravity once again, as it surged to a new all-time high despite the decline in crude oil, while short interest in the shares is still standing at 41%. Omnicom (OMC) rebounded quickly following its recent plunge, as it now has the highest days-to-cover ratio (DTC); 12. Extra Space Storage (EXR) also rallied strongly amid the mixed market action, while its DTC ratio climbed to 11, putting more pressure on shorts in the meantime.
Traders should be in for a quiet summer week after the Fed-dominated period, as far as economic releases are concerned, at least. The recently struggling housing market will provide the only new input for the economic models, as existing home sales will come out on Wednesday, while new home sales will be released on Friday. The Gorilla will keep a close eye on the Nasdaq’s progress. Any further weakness in the segment could lead to trouble for the broader market, while the Russia-related troubles of Donald Trump are still making headlines as well. The decline in the price of oil also continues to weigh on the energy segment, but despite the worries, stocks have remained encouragingly resilient so far this summer. Stay tuned!