Wall Street experienced a correction last week following the historic “Trump-rally” of the past few weeks. The slight decline was broad, although the huge difference between the various sectors persisted. The Nasdaq remained the weakest segment of the market, as some of the previous leaders of the bull market continue to struggle in the new environment. So far, the new administration of the President-elect is nothing short of surprising, and investors are still looking for clues concerning the future policies. The Gorilla is curious to see how long the great divide between the sectors will last.
The bond market remained in the spotlight, as Treasury yields continued their relentless advance, hitting new 11-month highs. The mostly favorable economic numbers reassured investors that the Federal Reserve won’t shy away from a rate hike this time around. The bullish prelim GDP growth number set the tone for the week, and the blowout Chicago PMI, the better-than-expected ISM manufacturing PMI, and the decent non-farm payrolls reading all made bulls smile. OPEC, somewhat surprisingly, agreed on a much-needed production cut for the energy sector, but the Gorilla thinks that the effectiveness of the move is questionable, despite the strong initial reaction by the commodity.
Technicals still look promising despite the recent correction, with significant differences between the major indices. The Nasdaq is still in the weakest position overall, with the Dow being the strongest benchmark for now. The Dow and S&P 500 both trade above their 200-, and 50-day moving averages, but the tech index closed below both indicators last week. Small caps also pulled back following their amazing run, as the Russell 2000 closed below its 50-day moving average, but still above its rising long-term average. The Volatility Index (VIX) continues to be well below the “danger zone,” despite the mid-week spike. The VIX closed the week near the 14 level, after hitting a weekly high of 15 on Thursday.
Market internals continued to be mixed, as the strong “sector rotation” means that a relatively large number of stocks aren’t following the market higher. The Advance/Decline line shows a slight negative divergence thanks to the recent correction, as declining stocks outnumbered advancing issues, by a 3-to-2 ratio on the NYSE and by a 3-to-1 ratio on the Nasdaq last week. The average number of new 52-week highs declined sharply on both exchanges amid the correction, falling to 173 on the NYSE and 200 on the Nasdaq. The number of new lows jumped higher in the meantime, rising to 69 on the NYSE and to 48 on the Nasdaq. The ratio of stocks above their 200-day moving average also declined last week, closing the week just above the 60% level once, causing some concern for bulls.
The list of the most shorted stocks on the NYSE and the Nasdaq is still in turmoil following the elections, with a generally bullish tone to the change, especially after crude oil production cut. Oil and gas exploration company Atwood Oceanics (ATW) remains heavily shorted, with a short interest of 46%, despite rallying by more than 20% following the OPEC deal. Shake Shack (SHAK) continues to creep higher on the list, currently with a short interest of 43%, even after rising by 18% in November. Verisign (VRSN) jumped back to the top of the list with the highest day-to-cover ratios (DTC), with a reading of 18, as the shares declined by 5% in one week. Harley Davidson (HOG) also popped up on the list, with a reading of 10%, although shorts had been squeezed by a 30% rally in November.
Traders will likely turn their attention to the upcoming central bank meetings before the Christmas “lull,” as all the major monetary authorities will gather together in the next two weeks. Traders still have to wait another week for the Federal Reserve, but the ECB and the Bank of Canada will decide on their benchmark rate on Thursday and Wednesday respectively. Apart from the central banks, the ISM non-manufacturing PMI will be released on Monday, with the consumer sentiment index coming out on Friday. The Gorilla expects a relatively quiet week before the crucial Fed meeting, as the price of oil and Mr. Trump’s decisions are likely to be the center of attention. That said, the Gorilla hopes that the correction in stocks will end soon, and bulls get to enjoy new all-time highs again. Stay tuned!