Wall Street registered yet another positive week (its fifth in a row), as the major indices continued to set record highs in the first half of the period. Growing political fears regarding the coming French and German elections dominated headlines, but the slightly gloomy sentiment wasn’t enough to stop the “roaring bull.” It was a relatively calm week for Donald Trump, and the lack of domestic catalysts led to a new 20-year low in weekly volatility. On a negative note, the Nasdaq lost some of its recent steam amid mixed earnings reports. Hewlett Packard (HP) and Elon Musk’s poster child Tesla (TSLA) published some discouraging numbers, and tech stocks entered a slight correction in the second half of the holiday-shortened week.
Economic releases were few and far between, as only the minutes of the Fed’s latest meeting caused some buzz on the Street. The slightly cautious words by FOMC members supported equities on Wednesday, as the odds of coming rate hikes decreased slightly. The rumors of a possible delay regarding Mr. Trump’s much-awaited tax reform pushed the market lower, as expectations remain high concerning the effects of the plan. New home sales provided another negative surprise in January, as the rising rates continue to weigh on the housing market, even though existing home sales were a hair above expectations.
Technicals deteriorated somewhat, as the major indices have been diverging recently. The Nasdaq finished virtually unchanged for the week, despite being the leader of the previous period. The Dow and the S&P 500 are still well above their 50- and 200-day moving averages, but the Nasdaq closed right at its short-term indicator after the two-day correction. The Russell 2000 had a decisively negative week, and the small-cap benchmark is now below its 50-day average after lagging the broader market throughout the period. The Volatility Index (VIX) remains near its historical low, as it was mostly unaffected by the mixed price action. The VIX hovered around the 12 level all week long and finished near 11.75 on Friday.
Market internals are mixed, as small caps have performed relatively weak. That said, the overall picture remains bullish. The Advance/Decline line finished slightly in the green again, as advancing issues outweighed declining stocks, by a 2-to-1 ratio on the NYSE, and by a 3-to-2 ratio on the Nasdaq. The average number of new 52-week highs remained encouragingly high on both exchanges, dipping to 199 on the NYSE, but rising to 209 on the Nasdaq. The number of new lows edged higher in the meantime, jumping to 17 on the NYSE, and 34 on the Nasdaq. The ratio of stocks above their 200-day moving average was virtually unchanged, finishing the week at 71% again, giving bulls something to cheer about amid the correction.
Short sellers are still in a precarious position in general, as the slight dip in prices provided little relief amid the sustained rally. The energy sector continues to dominate the list of the most shorted stocks, as rising U.S. crude oil output might spell trouble for the sector. Short interest in RPC Inc. (RES) is still above 53%, as the stock is now 15% off its January highs. GoPro (GPRO) is showing some bullish signs, as it held up above a crucial support level in February, even as the short interest in the stock hit 50%. Realty Income (O) has been creeping higher on the list of the stocks with the highest day-to-cover ratio (DTC), despite the steady rally in the stock this year. C.H. Robinson (CHRW) had another blowout week, and the DTC ratio of 13 means that bears might be in for more trouble.
Traders are in for a busy week regarding economic numbers, as there will be crucial releases coming out almost every day. Durable goods orders will be the first in line, followed by the key prelim GDP reading on Tuesday. The ISM manufacturing and non-manufacturing indices are scheduled for Wednesday and Friday respectively. The earnings reports of high-flying online travel services provider Priceline (PCLN) and Costco (COST) will be closely watched by investors this week, as Wall Street concludes a bullish earnings season. The Gorilla thinks that it’s wise to monitor the negative divergences that emerged recently, as the major indices have had a stellar 2017 thus far, leading to a slightly “overbought” state. That said, even a correction would leave the bull market intact, while providing a buying opportunity for bulls. Stay tuned for a busy week on Wall Street!