Stocks experienced a healthy rally towards the end of last week, after the uncertainty regarding the Federal Reserve cleared on Wednesday. Investors feared a “premature” rate hike by the Central Bank that could have sparked a deeper correction on Wall Street. The major indices climbed back to trade close to their all-time highs following the “dovish” statement by the FOMC, in which Yellen & Co. pointed to slower growth and the lack of evidence of a sustainable recovery. On a positive note, the recent correction didn’t cause significant technical damage, and technology stocks, together with small caps, still form a robust leadership.
Bond markets also bounced back on the heels of the Fed statement, as interest rate expectations shifted meaningfully lower once again. The housing market showed some weakness in August, as building permits and housing starts missed expectations, with both indicators coming in at an annualized rate of 1.14 million units. Traders will have a relatively busy week regarding economic releases, as this time around central banks will probably take the back seat. The consumer confidence index will be published on Tuesday, durable orders will come out on Wednesday, while the much-awaited final GDP print is scheduled for Thursday release.
The technical picture improved significantly last week as the major indices steered clear of most of their crucial moving averages following the Fed decision. The Nasdaq surged to a new high and finished the week above both its 50- and 200-day moving averages, while the slightly lagging Dow and S&P 500 also rose above their short-term averages, but remain below their long-term indicators for now. The relatively strong Russell 2000 hit a 52-week high as well, as the small cap index joined the Nasdaq above both of its moving averages. The Volatility Index (VIX) quickly retraced its recent spike, and finished the week just above its recent multi-year low near 12.50.
Market internals also improved, although they remained strong enough throughout the recent correction as well. The Advance/Decline continued to march to a new all-time high, as advancing stocks outnumbered declining issues by a 4-to-1 ratio on the NYSE and by a 6-to-1 ratio on the Nasdaq. The number of new 52-week highs declined alarmingly on both exchanges, to an average of 81 on the NYSE and to 126 on the Nasdaq, while the number of new lows was virtually unchanged at 13 on the NYSE and at 31 on the Nasdaq. The ratio of stocks trading above their 200-day moving average recovered above 76% on Thursday, and it finished close to its 3-year high, despite Friday’s weakness.
Short interest remained low in the most shorted stocks on both the NYSE and the Nasdaq, despite the slight dip in prices, as the energy sector continues to dominate the list. Drilling equipment provider RPC (RES) continues to be tricky for bears, as the stock rallied by more than 10% last week, while the short interest in the company increased to 49%. Medical marijuana company Insys (INSY) is still the most shorted stock with a short interest of 71%, as volatility in the stock remains extreme as well. The list of the stocks with the highest day-to-cover ratios (DTC) was virtually unchanged last week, with only real estate investment trust Digital Realty (DLR) entering the top five with a reading of 19. The DTC ratio of auto part distributor Autozone (AZO) declined sharply to 16, following a bullish reversal in the price of the stock.
Despite the encouraging signs, there are still worrisome trends that the Gorilla continues to monitor. The energy sector remains in a sorry state, as the price of oil is still well below the psychologically important $50 per barrel level. This is weighing heavily on the balance sheets of oil & gas companies. The financial sector is also lagging behind the broader market, as banks are now expected to be squeezed even longer by the historically low interest rates. The first Presidential debate tonight might also make some waves this week, as the campaign enters its final stage. All that said, the market seems to be shrugging off bad news and international worries for now, with the traditional growth segments showing encouraging strength. With that in mind, stay tuned for an interesting period on Wall Street!