Traders experienced one of the most volatile overnight markets in recent years last week, between Tuesday and Wednesday, as the surprising results of the Presidential election started coming in. The initial panic turned into a healthy bounce on Wall Street, as investors realized that the world would probably not end, no matter who the president ended up being. The furious rally in the second half of the week ended the 9-day losing streak for stocks, although the advance was far from being equally generous concerning the different sectors of the market. The Gorilla noticed that investors tried to gauge the policy choices of the new President, which led to extreme differences between the “favored” segments and the possible losers.
The bond market also turned upside down following the election, as Treasuries collapsed across the curve, with longer-term bonds declining the most. The spike in yields was attributed to the inflationary nature of Mr. Trump’s huge infrastructure plans, which will likely get the needed votes in the Congress, as both chambers are now controlled by the Republican Party. On a positive note, stocks and yields managed to rally together, although the Gorilla noted weakness in some crucial parts of the market. The most watched economic numbers of this week, the CPI and the Philly Fed index, will be released on Thursday, with retail sales reports coming out on Tuesday.
Technicals improved significantly last week, despite the fact that the Nasdaq underperformed the broader market, with some of the prior leaders lagging behind the major indices. The Dow and the S&P 500 both finished back above their 50- and 200-day moving averages, with the Dow even hitting a new all-time high on Thursday. The Nasdaq failed to rise above its short-term moving average, although it closed the week above its long-term indicator. Small caps surged higher last week following an extended period of weakness, as the Russell 2000 hit a new all-time high for the first time since June 2015. The Volatility Index (VIX) crashed below the 14 level following the overnight madness on Tuesday, and finished the week back in the “safe zone,” near 15.10.
Market internals got notably more bullish after the election. However, the Gorilla still sees some negative divergences, although the strong performance of small caps is encouraging. The Advance/Decline line bounced back after a month of weakness, as advancing stocks outnumbered declining issues, by a 5-to-1 ratio on the NYSE and by a 4-to-1 ratio on the Nasdaq. The average number of new 52-week highs skyrocketed on both exchanges, rising to of 168 on the NYSE and to 208 on the Nasdaq. The number of new lows also remained high, rising to 115 on the NYSE, but falling to 88 on the Nasdaq. The ratio of stocks above their 200-day moving average rose back above the 60% level, although it remains well below the previous highs, confirming the mixed picture across the various segments of the market.
The list of the most shorted stocks on the NYSE and the Nasdaq also experienced turmoil, as investors restructured their bearish bets in the wake of the result of the election. The short interest in EP Energy (EPE) declined significantly to 45%, as traders priced in the possibly of loosening regulation in the sector. Shorts increased their positions in wellness software provider Mindbody (MB) to 41%, despite the continued strength of the stock, which remains just below its all-time high. Jewelry retailer Tiffany & Co. (TIF) jumped to the front of the list with the highest day-to-cover ratios (DTC), with a reading of 19 as the stock surged to a new 52-week high. Struggling Frontier Communications (FTR) took the second place, with a DTC ratio of 16, as the stock took a nosedive in recent weeks.
The aftermath of the Presidential election might provide more surprises for traders, but the Gorilla thinks that the initial reaction of the market is encouraging, despite the widespread confusion. On a positive note, with over 90% of companies reporting, the earnings picture looks more positive than at any time in the last couple of years. An impressive 70% of the firms beat the consensus estimate this quarter, and aggregate earnings grew on a yearly basis for the first time since the first quarter of 2015. That said, the economy remains fragile, but the Gorilla hopes that stocks will finally head higher as the political uncertainty clears, and the favorable year-end seasonality starts to kick in. Stay tuned for another interesting week on Wall Street!