The major indices headed lower last week, following the internal weakness that the Gorilla noticed in recent weeks. The short-term correction has been fairly muted so far, as most stocks remained above their September lows, and volatility also remained tame. The British pound continued to be the center of attention, as the extreme moves by the currency remain a concern for traders, just as the persistently negative news regarding some “too-big-to-fail” European banks. Increasing rate hike odds also contributed to the slight decline, as the mostly positive economic releases, especially the bullish retail sales report, didn’t translate to optimism on Wall Street.
As a sign of a hawkish Federal Reserve, Treasury yields rallied ”across the curve,” although short-term government bonds notably underperformed towards the end of the week. The minutes from the latest FOMC meeting revealed that it was a “close call” not to increase the benchmark rate in September, despite the fact that GDP growth slowed to 1.4% according to the latest estimates. The most awaited economic releases this week will include the CPI index on Tuesday, building permits on Wednesday, and the Philly Fed index on Thursday. The European Central Bank will decide on its base interest on Thursday as well, with Janet Yellen and the Fed likely paying close attention to even the slightest changes in the Central Bank’s monetary policy.
Technicals deteriorated slightly last week, as the indices “caught up” with the short-term weakness in market internals, leaving the long-term uptrend unharmed for now. The major indices all dipped below their short and long-term moving averages, with the Nasdaq still being the most bullish. The declining 50-day moving average is now below the 200-day moving average in the case of the Dow and S&P 500, while the indicators remain in bullish alignment for the tech benchmark. Small caps were relatively weak for the second week in a row, and the Gorilla will look for this to change when trying to spot the end of the correction. As a positive sign, the Volatility Index (VIX) closed the week near the 16 level, showing no sign of fear among traders.
Market internals continue to show some fragility “under the hood” although the Gorilla sees no real danger in the current readings. The Advance/Decline turned lower last week as declining stocks outnumbered advancing issues, by a 4-to-3 ratio on the NYSE and by a 5-to-4 ratio on the Nasdaq. The number of new 52-week highs continued to decline on both exchanges, falling to 65 on the NYSE and to 60 on the Nasdaq. The number of new lows jumped on both exchanges, to 30 on the NYSE and 70 on the Nasdaq. The ratio of stocks above their 200-day moving average also fell significantly, as the ratio sits at 66%, falling almost 10% in just two weeks!
Despite the recent rally in the price of oil, energy companies still dominate the list of most shorted stocks on the NYSE and the Nasdaq, as short interest remains relatively low across the board. The short interest in the second most shorted company Adeptus Health (ADPT) increased by 8%, to 56%, as the stock remained under pressure in October. Software developer Twilio (TWLO) has been in the crosshairs of short sellers this month, as the short interest in the stock rose by 30% to 47%, as the shares fell by 35% in three weeks. Verisign (VRSN) jumped back to the front of the list of the stocks with the highest the day-to-cover ratios (DTC), with a reading of 18. Advertising holding Omnicom (OMC) overtook Western Union (WU) as well, with a DTC ratio of 17, despite the relative strength of the stock throughout the week.
The Gorilla thinks that bulls remain in control on Wall Street, despite the current slide, as the “leadership” provided by tech stocks remains healthy. The recent drop in consumer confidence might be attributed to the unusually negative nature of the Presidential campaign, but the Gorilla hopes that the effects of the recent fireworks will soon pass. The Federal Reserve will probably stay in the spotlight for the coming weeks, besides the upcoming elections, as a lot of investors still think that the rate hike schedule of the Central Bank has the biggest potential impact on the stock market. That said, the Gorilla would rather focus on the price action itself, and the arising opportunities in the current correction. Stay tuned!