Traders had to wait until Friday’s session again for any sustained move on Wall Street, as all eyes were focused on the non-farm payrolls number that traditionally comes out on “Jobs Friday.” This time around it was well worth the wait, as the blowout 287,000 reading triggered one of the strongest one-day rallies of 2016. The late-week lift finally ended the choppy consolidation that made investors scratch their heads throughout the holiday-shortened week. The major indices now fully erased the “Brexit-crash” that scared bulls just two weeks ago, as the economy shows no signs of rolling over, despite the harsh international environment.
Amazingly enough, stocks are trading close to all-time highs, as are Treasuries of all maturities. The 10-year yield hit 1.35% this week, as investors seem sure that there will be no more rate hikes coming this year. The seemingly endless stream of terrible international news and the next wave of monetary easing in Europe, leave little room to the Fed for tightening. It seems to be the perfect combination for the stock market at least for now, although the Gorilla would be happier if the economy would be able to grow on its own, without the help of the almighty central bankers.
The technical setup is still encouraging for the bulls as more and more stocks seemed to join the rally. With their help, the major indices might finally manage to pass the “resistance” zone, marked by 18,000 on the Dow and 2100 on the S&P 500, for good this time around. The benchmarks all finished the week well above their 50-day and 200-day moving averages, as even the relatively weak Nasdaq showed strength towards the end of the week. The Russell 2000 outperformed the large cap indices last week, providing a solid base for the rally. The Volatility Index (VIX) fell to 13; the lowest in a month on Friday, after being as high as 27 two weeks ago.
The rally is supported by strong market internals, as small caps are having a great month so far. The Advance/Decline line rocketed to new highs last week, as advancing stocks outnumbered declining issues by a 6-to-1 ratio on the NYSE and by a 7-to-1 ratio on the Nasdaq. The average number of new 52-week highs declined slightly to 238 issues on the NYSE, but doubled to 147 on the Nasdaq. The average number of new lows nearly halved on both exchanges, to 25 on the NYSE, and to 37 on the Nasdaq. The ratio of stocks above the 200-day moving average hit 67% on Friday, the highest reading in 2 years.
The list of the most shorted stocks on the NYSE and the Nasdaq is still dominated by biotech and healthcare companies. Drug manufacturer Relypsa (RLYP) popped up on the radar with a short-interest of 48%, despite a 20% rise in the stock since mid-June. LendingTree (TREE) is also up by 30% in the past three weeks, and shorts seem to be doubling down, as short-interest in the stock rose to above 50% for the first time last week. Another candidate for a short squeeze is semiconductor producer Lam Research (LRCX), which trades just below its all-time highs, with a day-to-cover ratio (DTC) of 18. Marriott (MAR) hit a new 2-month high on Friday, and bears might be on the edge of their seats, with the DTC being over 21.
The Gorilla hopes that the bullish non-farm payrolls number finally gave the green light for the next leg of the bull market after two years of consolidation. With the more pleasant thrills of the Olympic Games in Rio just a few weeks away, investors might have a calm July after the brief volatile period. Friday’s session will probably be the most volatile again, as the retail sales number and CPI report will both be released on the last day of the week. Earnings reports will also start arriving this week, and the Gorilla thinks that it’s hard to imagine another lackluster quarter after the worst earnings recession in 7 years. Stay tuned for a week with, hopefully, no more fireworks on Wall Street!