Wall Street endured multiple blows during the holiday-shortened week, as investors were spooked by renewed geopolitical tensions, an intense hurricane season, and central bank uncertainties. The major indices started out the week on a negative note after the hydrogen bomb test conducted by North Korea, which will likely have widespread consequences in the coming months. The market recovered well and held its ground, as trading activity and volatility increased post-Labor Day, as per usual. The most awaited event, the ECB’s monetary meeting, caused the largest waves, especially in bonds and currencies. Despite the slight overall losses, stocks continue to show nice relative strength, and the end-of-the-week performance of small caps made the Gorilla especially happy.

With the main “risk-off” assets, like gold, the Japanese yen, and Treasuries closing the week substantially higher, the minuscule dip in equities is even more formidable. The few economic releases were a tad on the bearish side, with the ISM non-manufacturing PMI missing the consensus estimate, and new jobless claims jumping to almost 300,000 following the number of the Harvey-distorted previous week. The trade deficit was slightly narrower-than-expected, but apart from stocks, every asset class traded in line with the slowing economy narrative. The Bank of Canada surprised the market with a 0.25% rate hike. While the ECB kept its policies and tightening schedule unchanged, the “hawkish” environment did not change the declining trend in treasury yields.


The technical picture deteriorated somewhat after a previous improvement, but the overall bullish setup is unchanged, with only a few small question marks. The Dow, the S&P 500, and the Nasdaq are each still above both their 50- and 200-day moving averages, although the mega cap index is barely north of the short-term indicator. The tech benchmark lost some of its relative strength as well, and the Gorilla will keep an eye on that this week. Although the Russell 2000 dipped below its 50-day moving average after the long weekend and stayed there throughout the week, it outperformed its large cap peers in the second half of the period. The Volatility Index (VIX) spiked higher during the decline, and it is still well above the 10 level that has been the norm in recent months thanks to the increase in trading activity.


Market internals didn’t signal any significant changes “under the hood,” as the most reliable measures moved in line with the path of the major indices. The Advance/Decline line ended the week slightly lower, without suffering major damage as advancing issues still outnumbered declining 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 continued to climb for the third week in a row, rising to 120 on the NYSE, and 140 on the Nasdaq. The number of new lows bounced back a bit, edging higher to 51 on the NYSE, and 38 on the Nasdaq. The ratio of stocks above their 200-day moving average also declined by a small margin, but it finished right at the still-low 60% mark, despite the strength in small caps.


Short activity increased a bit, together with volatility, and the general mood seems to have turned more cautious, with more institutional interest towards hedging than before. The shorts of RH Inc. (RH) had a rough week, as the stock skyrocketed by 40%, and with a short interest of 57%, the future doesn’t look too bright for bears either. RPC Inc. (RES) is also in a volatile period, and the short interest of 53% points to a skewed risk profile to the upside. Extra Space Storage (EXR) popped up on the list of the stocks with the highest days-to-cover (DTC) ratio, with a reading of 13, and the stock’s 10% surge in one week suggests that a short squeeze might be underway. Realty Income (O) defied the headwinds and climbed to a new 4-month high amid the slight correction, and with the DTC ratio of 14, the pain will likely only increase for bears.


The Gorilla expects that the elevated trading activity is here to stay, and the historically quiet summer market could be gone for good. That said, the rise in the VIX didn’t hurt the major indices too much, and the resilience of the bull market is still apparent. The retail sales and CPI reports will be the most awaited economic releases of the week, as traders will brace themselves for next week’s Federal Reserve meeting. Bond markets seem convinced that the Fed will take a cautious approach in the coming months, as yields have been steadily declining, in part, because of the disappointing economic news, with the North Korea situation also heavily influencing Treasuries. The Gorilla hopes Florida will emerge from the hit of Hurricane Irma without any major damage, and stocks will continue their strong showing. Stay tuned!