Wall Street registered yet another encouraging week after a brief correction, as the major indices continued their relentless rally. Technology stocks were the strongest once again, as the Nasdaq completed a “clean sweep,” with five bullish sessions in a row. Donald Trump remained in the spotlight, as he hinted on an upcoming tax reform, which sparked a surge in equities on Wednesday. The new President has previously pledged to cut taxes across the board, and investors would consider quick tax relief a really bullish sign for stocks. Earnings reports provided some negative news recently, as Coca-Cola (KO) and General Motors (GM) both posted disappointing numbers, despite the stable economic conditions.
The economic calendar was almost empty last week, and even the most watched indicator, the University of Michigan Consumer Sentiment Index didn’t have a significant impact on the market. The index came in slightly below what economists had expected, but it remains close to a 10-year high. On an interesting note, crude oil inventories grew by a record amount last week, as domestic production is picking up once again following last year’s turmoil. The rising output, coupled with the proposed regulatory easing by the new administration, paints a gloomy picture of the supply-demand balance of the crucial commodity. The Gorilla thinks that the energy sector still could be in for a positive period, as the price of oil remained stable despite the strongly bearish fundamental developments.
Technicals remain firmly positive, as even small caps caught up to the broader market in the second half of last week. The major indices are all showing strong bullish momentum, as the Nasdaq, the Dow, and the S&P 500 are still well above their 50- and 200-day moving averages. The Russell 2000 surged back above both indicators as well, while getting close to its all-time high after a rather lengthy consolidation. The Volatility Index (VIX) drifted lower amid the bullish price action, and it remains close to its decade-long low near the 10 level. Interestingly enough, the S&P 500 didn’t register an intraday move of more than 1% for almost two months now, which is the longest streak in the past 25 years!
Market internals improved once again amid the broad rally, as the jump in small caps helped even the slightly lagging measures. The Advance/Decline line resumed its steep uptrend after the brief correction of the previous week, as advancing issues outnumbered declining stocks, by a 4-to-1 ratio on the NYSE and by a 5-to-1 ratio on the Nasdaq. The average number of new 52-week highs bounced back on both exchanges, rising to148 on the NYSE, and 154 on the Nasdaq. The number of new lows remained very low, falling to 13 on the NYSE, and 32 on the Nasdaq. The ratio of stocks above their 200-day moving average continued to edge higher, confirming the strength of the rally, as it breached the 72% level for the first time in 4 months.
Short interest hit another record low on Wall Street, as bears continue to scramble for the exits, while it seems like stocks are hitting new all-time highs on a daily basis. The energy sector still dominates the list of the most shorted stocks on the NYSE and the Nasdaq, despite the favorable price action in oil. Short interest in EP Energy (EPE) surged by 10%, to 55%, while the stock remained under pressure throughout the week. Drug manufacturer Lannett (LCI) also saw an increase in selling activity, as short interest rose to 45% recently. Western Union (WU) is still near the top of the list of the stocks with highest day-to-cover ratios (DTC), with a reading of 13, as shares are down by almost 15% this year. Teradata (TDC) remains a primary concern for bears, as the stock jumped by more than 10% last week, while the DTC ratio remained at 12.
Several crucial economic releases will come out this week, and Wednesday could be the busiest day for traders. Janet Yellen will testify regarding the Fed’s monetary policy, while retail sales and CPI reports will also be released during the session. The Philly Fed Index and building permits will come out on Thursday, and the PPI index is scheduled for release on Tuesday. The end of the earnings season is drawing closer, although Pepsico (PEP), Cisco (CSCO), and Kraft Heinz (KHC) will still be publishing their quarterly numbers in the coming days. The Gorilla is also looking forward to the details of Mr. Trump’s tax initiative, as the plan could have a profound effect on stocks in either direction, especially since expectations are already sky high. Stay tuned for a possibly volatile week!