Volatility shot higher last week on Wall Street as stocks turned lower in the aftermath of the Fed’s second rate hike in three months. The S&P 500 ended an incredible streak of more than 100 sessions without a decline of 1%, as investors were spooked by the Republican Party’s inner struggle regarding the planned replacement of Obamacare. The energy segment was also among the drivers of the decline, as the price of oil continues to be under pressure, thanks to the robust growth in domestic shale-output. The Gorilla still thinks that these might very well be just “excuses” for the major indices to clear the overbought state that emerged in the wake of the historic “Trump-rally.”
The economic calendar was virtually empty last week, with only the durable goods report providing new information regarding the health of the economy. Orders came in above the consensus estimate, while core orders matched expectations. Initial jobless claims spiked to 261,000, but that reading is still far from being a cause for concern. Traders were eagerly looking for guidance from the Fed on the timing of the next rate hike, as the odds for a move in June are exactly 50% following the cautious FOMC-statement. Several Fed officials gave speeches during the week, but none of them gave a clear indication regarding the central bank’s roadmap.
The short-term technical picture deteriorated significantly, as the major indices all closed the week near their weekly lows. On a positive note, the Nasdaq retained its relative strength, and small caps also showed some resilience toward the end of the period. The Dow and the S&P 500 both got close to their 200-day moving averages and finished well below their 50-day averages. The tech benchmark retreated from another new all-time high, to close the week slightly below its short-term average but still above its long-term measure. The Russell 2000 plunged below both indicators and remains more bearish than the broader indices. The Volatility Index (VIX) surged higher, as traders felt the heat for the first time in a while. The VIX finished the week at its year-to-date high, just above the 14 level.
Market internals also took a hit after the broad recovery of the previous week, although the late-week strength in small caps helped in limiting the damage. The Advance/Decline line dipped lower from its all-time high, as declining issues outnumbered advancing stocks, by a 2-to-1 ratio on the NYSE and by a 3-to-2 ratio on the Nasdaq. The average number of new 52-week highs nearly halved on both exchanges, falling to 71 on the NYSE, and 85 on the Nasdaq. The number of new lows rose slightly in the meantime, to 42 on the NYSE, and 59 on the Nasdaq. The ratio of stocks above their 200-day moving average turned lower again, falling back to its multi-month low near 64% toward the end of the week.
Short interest remained muted as bears are still seemingly in hibernation, despite the recent correction. Domain service provider GoDaddy (GDDY) is still heavily shorted two years after its IPO, with a short interest of over 70%, even as the stock hit a new all-time high recently. Pilgrim’s Pride (PPC) continues to burn shorts consistently, as the stock is up another 10% in March, with the short interest still standing at 43%. Western Union (WU) is recovering well following its steep fall in January, as the stock is still high on the list of the stocks with the highest days-to-cover ratio (DTC), with a reading of 11. Medical equipment manufacturer Intuitive Surgical (ISRG) might be causing panic among shorts, as the stock surged to yet another new high on Friday, and the DTC ratio is still above 10.
Traders might be in for another tricky week after the surprising withdrawal of the healthcare bill by the GOP, as the uncertainty will likely weigh heavily on investor sentiment. Tuesday’s CB consumer confidence reading will be closely watched by traders, given the Fed’s “data-dependant” stance and the importance of the consumer segment. The final GDP print will also come out on Thursday, but the week will still be short on major releases. The broad indices have been in consolidation mode for almost a month now, so the Gorilla will be on the lookout for buying opportunities, as the long-term uptrend is still very much intact. With that in mind, bulls should get ready for another exciting week. Stay tuned!