Stocks had an unexpectedly busy week, despite the relatively empty economic calendar and the end of the crucial part of the earnings season. Geopolitics and the bond market provided negative catalysts, as the Middle East is in turmoil again, with a Saudi Arabian epicenter, while high-yield corporate bonds are signaling some trouble in the “goldilocks” economy. The struggle surrounding the GOP’s tax plan also weighed on sentiment, as the POTUS traveled to Asia, leaving behind a divided party. Although the major indices finished the week right where they started, the volatile selloff on Thursday and the apparent “under-the-hood” weakness caused worries for the Gorilla, even as the long-term trend is undoubtedly bullish.
The few economic releases were slightly disappointing, but that didn’t change the improving trend of the previous week, with no major indicators coming out after Jobs Friday. Consumer sentiment ticked lower unexpectedly, while new jobless claims rose more than expected from their decade-long lows. Treasuries were very active in the date-free environment, as the flattening of the yield curve stayed in the center of attention, despite the late-week dip in long-dated bonds. “Junk” bonds raised eyebrows on Wall Street, as they sold off sharply in the face of the equity strength, pointing to some risk aversion among smart money investors.
The technical picture is still bullish in all time-frames, but the leaders of the Nasdaq were once again the best-performing segment of the market, as mega-cap stocks continued to outperform smaller issues. The Dow, the S&P 500, and the Nasdaq are still above both their 50- and 200-day moving averages, although all benchmarks drifted closer to their key indicators. The Russell 2000 was hit harder by the likely delay in the corporate tax cut. Small caps finished in the red for the week, as the Russell 2000 closed right at its short-term moving average, but still well north of its long-term measure. The Volatility Index (VIX) jumped to a two-week high on Thursday, and finished the week near 11, as investors were spooked by the emerging risks.
Market internals remain concerning, as the decline in small caps and the late-week volatility affected the most reliable measures in a negative way. The Advance/Decline line continues to trend lower, despite the new all-time highs in the major indices just a few days ago. Advancing issues still outnumbered declining stocks by a 4-to-3 ratio on the NYSE and by a 3-to-2 ratio on the Nasdaq. The average number of new 52-week highs plunged lower on both exchanges, falling to 119 on the NYSE, and 118 on the Nasdaq. The number of new lows rose in the meantime, climbing to 66 on the NYSE, and 78 on the Nasdaq. The ratio of stocks above their 200-day moving average fell even lower amid the small-cap weakness, as it dipped below the 60% level for the first time since May.
Despite the worrisome signs and the increase in volatility, short interest remains very low and the Gorilla noticed bullish moves among the most shorted names. The recovery in Shake Shack (SHAK) is back on track following a brief correction, and with a short interest of 52%, the rally might trigger an outright short squeeze. The shares of battered solar player SunPower (SPWR) surged higher after the firm’s recent earnings report, and given the extremely high short interest of 79%, a lot of bears could be feeling the heat. Current GorillaPick, Garmin (GRMN), defied the broad weakness and hit a new 3-year high on Friday, while its days-to-cover (DTC) ratio still stands at 17, providing a solid base for a strong rally. Helmerich & Payne (HP) benefited from the rise in crude oil prices last week, and its DTC ratio of 13 points to further bullish potential.
Traders are in for a much busier week regarding economic numbers, as the housing market, the consumer segment, and inflation will all be in focus. The CPI and retail sales reports are scheduled for Wednesday, while the change in producer prices will be revealed on Tuesday, and the number of housing starts and building permits will come out on Friday. Industrial production and the Philly Fed index will also be published on Thursday, but the indicators might be eclipsed by the Middle East situation, as the tension between Saudi Arabia and Iran’s coalition now poses a major threat to the region’s stability. The Gorilla hopes that despite the risks, stocks will recover from the current weaker spell and Wall Street will see another round of new all-time highs. Stay tuned!