The last week of August was nothing short of great for bulls, as the market proved itself yet again, defusing the fears of a deeper correction. North Korea fired a ballistic missile over Japan, heating up geopolitical tensions, and the devastation of Hurricane Harvey turned out to be much worse than expected, but equities barely budged on the negative news. The major indices marched higher throughout the week, and September kicked off on a decisively bullish note, even following the dismal government jobs report on Friday. The notable outperformance of small caps was an encouraging sign for the Gorilla, as the internal weakness behind the relatively good performance of the larger issues painted a bleak picture of the health of the market before.
Despite the already mentioned jobs report, which missed consensus estimates across the board, economic numbers were better than in the previous period. Consumer confidence rebounded strongly, GDP growth was revised higher by a significant amount, the ISM manufacturing PMI came in way above expectations, and new jobless claims are still near their cycle lows. With all those numbers in mind, the slight miss in non-farm payrolls is not a terrible data point, but the lower-than-expected earnings growth and the uptick in the unemployment rate is enough to have the Gorilla worried. Despite the negative trend in yields, Bond markets are sending mixed signals, Treasuries reacted to the jobs report in a bullish way for equities, as yields closed the week well off their lows.
Technicals improved significantly thanks to the healthy rally, with all three of the major indices rising past several key resistance levels. The Dow, the S&P 500, and the Nasdaq all finished back above both their 50- and 200-day moving averages, with the tech benchmark clearly leading the way higher, actually touching a new all-time high on Friday. The Russell 2000 also recovered a huge chunk of its recent losses, and it easily recaptured its long-term average and finished right at its short-term indicator. The Volatility Index (VIX) reflected the healing process as well, as it dipped back to the 10 level, getting close to its recent historic lows, despite the recent spike in the risk perception of investors.
Market internals continued on their bullish path as well, and some of the measures suggest that the scary readings of the previous few weeks only signaled a small bump in the road. The Advance/Decline line hit a new high for the major indices, and it continues to be a leading indicator, as advancing issues outnumbered declining stocks by a 4-to-1 ratio on the NYSE and by a 6-to-1 ratio on the Nasdaq. The average number of new 52-week highs rose for the second week in a row, climbing to 82 on the NYSE, and jumping to 112 on the Nasdaq. The number of new lows continued to decline steadily, dropping to 40 on the NYSE, and 36 on the Nasdaq. The ratio of stocks above their 200-day moving average finally showed signs of real improvement, as it surged back above 60% with help from the recovery in small caps.
Short interest declined strongly once again, especially toward the second half of the week, but bears are still more active than they have been earlier in this year. Avis (CAR) took a breather during the market correction last month, but the stock jumped to a new 7-month high last week, despite its short interest of 41%. Lannett (LCI) is among the top three most shorted stocks, with a short interest of 58%, and a short squeeze might be already underway after the rally from $15 to $18 in two weeks. C.H. Robinson (CHRW) is still in the top ten on the list with the highest days-to-cover (DTC) ratio, with a reading of 12, and the stock surged by more than 10% in one week amid the improving sentiment. CarMax (KMX) got close to its two-year high after three blowout sessions, and the DTC ratio of 11 suggests that there is more pain to come for bears.
This holiday-shortened week is sometimes a huge turning point for stocks after the relatively boring summer months. This does not necessarily mean a downturn, and the recent broad strength is a bullish sign for the coming period. That said, volatility might rise significantly as trading volume is likely to increase, and the VIX will probably say goodbye to single digit readings for a while. The economic calendar is almost empty, but Wednesday could still bring huge moves, as the European Central Bank will hold its monetary meeting. Since it comes before this month’s Fed decision, investors will be closely watching Mario Draghi’s press conference. Apart from that, only the ISM non-manufacturing PMI will come out on Wednesday. The Gorilla hopes that the newly found strength in small caps will last more than just a week, and that it will translate to more new all-time highs in the major indices. Stay tuned for a promising week!