In the last two weeks, stocks settled back to trade in the same narrow range that they spent almost two months during the summer. Worries regarding the health of the European financial system made headlines once again, as Deutsche Bank (DB) continues to struggle, sparking fears of “global contagion.” The British pound “flash-crashed” on Thursday night, as it fell by more than 5% in a matter of seconds, also causing uncertainty in global financial markets on Friday. On a positive note, domestic stocks held up well in the negative environment, even after the slightly worse than expected non-farm payrolls number of 156,000.
Before “Jobs Friday,” economic releases were mostly positive again, raising the odds of a rate hike by the Fed in November to a new high on Thursday. The ISM manufacturing and non-manufacturing indices both came in above the consensus estimates, with the crucial services segment providing an especially promising reading. The FOMC meeting minutes will be in focus this week on Wednesday, as investors are eager to get any information regarding the Fed’s “roadmap” for its benchmark interest rate. Friday’s session might also be interesting, as the PPI index and the retail sales number will both be published. Mrs. Yellen is also scheduled to give a speech on macroeconomics in Boston.
Technicals remain bullish, but a bit more neutral following the continued sideways price action of the past few weeks. The major indices all trade in the vicinity of their converging short- and long-term moving averages, with the Nasdaq still being in the most encouraging position. The tech benchmark is above both the 50- and 200-day moving averages, while the Dow and S&P 500 are still slightly bearish, starting the week below their long-term averages. Small caps performed in-line with the broader market last week, showing alarming weakness on Friday. The Volatility Index (VIX) remained below 15 all week long, but it hovers a bit above the lows registered during the summer “lull” around 11.
Market internals are still positive although the Gorilla saw more negative divergences emerge towards the end of the week. The Advance/Decline line continued to hit all-time highs, as advancing stocks outnumbered declining issues, by a 3-to-2 ratio on the NYSE and by a 5-to-2 ratio on the Nasdaq. The number of new 52-week highs remained low on both exchanges, rising slightly to 88 on the NYSE and falling to 92 on the Nasdaq. The number of new lows rose on both exchanges, to 21 on the NYSE and to 37 on the Nasdaq. The ratio of stocks above their 200-day moving average took a nosedive, as this ratio sits at 71%, down from the 75% level registered during the previous week.
Short interest continued to remain muted on both the NYSE and the Nasdaq, as the pressure on the energy sector eased substantially. Bears significantly increased their positions in online loan provider LendingTree (TREE) recently, as the short interest in the company is back to 44% of the float. Communication services firm Gogo (GOGO) experienced increased activity as well, as the stock fell by 25% in two weeks, and the short interest climbed to 35% in the meantime. The list of the stocks with the highest day-to-cover ratios (DTC) also shows a bullish picture, with international payment provider Western Union (WU) still in the top spot with a DTC ratio of 16. The DTC ratio of contract drilling company Helmerich & Payne (HP) declined substantially, to 13 in recent weeks, as the stock rallied by more than 20%.
The Gorilla sees no real change in the underlying positive trend, despite the painfully long consolidation of the past few months, as tech stocks and small caps continue to provide a firm base for the bull market. The recent rally in the price of oil also provides a much-needed relief for the energy sector, without seriously endangering the ongoing expansion of the economy. That said, the Gorilla believes that international worries are here to stay, and as the pound’s decline made it clear yet again, traders should always expect unexpected things to happen in financial markets. Stay tuned for more fireworks this week!