Wall Street registered a very bullish week, following a slightly concerning period of negative divergences. The major indices all hit new all-time highs and closed the holiday-shortened week close to the record levels. Stocks have risen in 10 out of the past 11 sessions, as shorts were crushed after the brief, yet scary, correction two weeks ago. The lackluster non-farm payrolls figure, in which only 138,000 jobs were added, couldn’t stop the rally, as the strength in small-caps and the Nasdaq lifted the market. Donald Trump was in the spotlight once again, as he withdrew from the Paris accord on climate change, triggering angry reactions across the globe. Domestic stocks actually rallied on the announcement, as it means less regulation for the companies, even if the effects on the environment are negative.
Economic numbers were mostly negative once again, as the Consumer Confidence Index unexpectedly retreated, while pending home sales continued the streak of negative housing releases. The trade balance also came in worse-than-expected, and the number of new jobless claims ticked higher as well. The ISM manufacturing PMI was a tad higher than expected, but all in all, investors thought that the picture got gloomier, pushing Treasuries higher following the payrolls miss. Although a rate hike next week still seems more than likely, the long-term interest rate expectations took a hit recently, especially hurting the 10-year bond.
Technicals are in great shape thanks to the broad rally, with the lagging small-cap segment finally joining the party, as the Gorilla had hoped it would. The Nasdaq, the Dow, and the S&P 500 are all well above their 50- and 200-day moving averages, with the technology benchmark being back in the driving seat, following a short breather. The Russell 2000 surged higher in the second half of the week, rising back above its short-term average, while leaving behind the previously approaching long-term indicator. The Volatility Index (VIX) hit another decade-long low on Friday, as it finished just above the 9.5 level, after hitting 15.5 amid the “Russia sell-off.”
Market internals improved significantly thanks to the rebound in small caps, as all of the key measures ticked higher during the rally. The Advance/Decline line remained one of the strongest indicators, hitting new highs together with the main indices, as advancing issues outnumbered declining stocks by a 5-to-1 ratio on the NYSE and by a 6-to-1 ratio on the Nasdaq. The average number of new 52-week highs continued to increase on both exchanges, rising to 229 on the NYSE, and 213 on the Nasdaq. The number of new lows was virtually unchanged, edging lower to 52 on the NYSE, and rising to 63 on the Nasdaq. The ratio of stocks above their 200-day moving average recovered well after the scary decline, although the current 65% is still suspiciously low.
Short interest continues to hit record lows, with still only the energy segment experiencing selling pressure, thanks to the steep drop in the price of oil. The shares of software developer Box Inc. (BOX) rallied by 15% last week, while the short ratio is almost at 40%, signaling more trouble for bears. Shorts of Applied Optoelectronics (AAOI) are also feeling the heat, as the stock hit a new all-time high on Friday, with the short interest standing at 44%. Verisign, the leader on the list with the highest days-to-cover ratio (DTC) got close to its all-time high towards the end of the week, while the DTC ratio even increased to 17. Amerisource Bergen (ABC) gained another 10% after last week’s strong showing, hitting a new 15-month high, with the DTC ratio still being at 10.
Traders could be in for a very calm period, as the “summer-lull’ is approaching, as there are only a few important economic releases scheduled for this week. Traders are also likely to take a step back before the crucial Fed meeting next week, and the worries concerning the latest scandal of the President also calmed down a bit. The ISM non-manufacturing PMI will be the only meaningful release of the week, although the British elections might cause some volatility on Thursday, especially if the ruling party of PM Theresa May loses the referendum. The Gorilla hopes that stocks will remain as resilient as they have been in the past two weeks so bulls can celebrate additional new highs in June, in the face of the negative seasonality. Stay tuned!