The stock market settled down last week after the furious rally that followed the unlikely victory of Donald Trump in the Presidential election. The seismic shift toward financials and industry-related stocks continued, albeit in a less spectacular way. Investors are likely seeking exposure to the segments that are deemed to benefit from the proposed infrastructural spending spree, while taking some chips off the table in some of the export-related sectors. Traders might now turn their attention to the next meeting of the Fed in December, as rate hike odds are above 90%, and economic numbers are still moderately bullish.
The bond market and the dollar sent a clear message to the Gorilla that investors expect higher interest rates and inflation from a Trump presidency. The dollar index hit the highest level since early 2015, while Treasury yields rose to an 11-month high as well last week. On a positive note, stocks remained in a bullish position despite these shifts, although the same setup might have led to a meaningful sell-off just a few months ago. The two-faced nature of the economy is still obvious, as manufacturing continues to struggle, while services and consumption remain robust. Industrial Production and the Philly Fed Index both missed expectations, while retail sales and the CPI Index showed encouraging readings once again.
Technicals continued to heal thanks to the explosive rally, with all the major indices closing the week in a clearly bullish position. The Dow and the S&P 500 both finished way above both their 50- and 200-day moving averages, with the Dow hitting 19,000 for the first time in its history. The lagging Nasdaq slightly caught up to its peers, as it broke back above both the long- and the short-term average. Small caps continued to lead the market higher, with the Russell 2000 clearly outperforming the broader benchmarks, and rising to a new all-time high once again. The Volatility Index (VIX) drifted lower throughout the week, as political tensions eased. The VIX finished the week below the 13.50 level, after hitting a one-month low under 13.
Market internals remained mixed, despite the bullish price action, making the Gorilla slightly cautious concerning the fate of the current rally. The strength of small caps helped the Advance/Decline line in rising further after the rebound of the previous week, as advancing stocks outnumbered declining issues again, by a 4-to-1 ratio on the NYSE and a 5-to-1 ratio on the Nasdaq. The average number of new 52-week highs remained high on both exchanges, rising to of 181 on the NYSE and to 283 on the Nasdaq. The number of new lows fell sharply, to 90 on the NYSE, and to 37 on the Nasdaq. The relatively low ratio of stocks above their 200-day moving average remains a slight concern, as the 62% level is still way below the readings of the previous months, despite the all-time highs in the major indices.
The significant restructuring among institutional investors continued last week, which led to important shifts on the list of the most shorted stocks on the NYSE and the Nasdaq as well. Solar companies experienced a jump in short interest in general, with SolarEdge (SEDG) having the highest short interest of almost 50%, up by almost 15% in two weeks. The short interest in biotech firm Clovis (CLVS) declined sharply amid the rally in the sector, falling by 14%, to 30% since the election. Jewelry holding Jewelers (SIG) joined its competitor Tiffany & Co. (TIF) at the front of the list with the highest the day-to-cover ratios (DTC), with a reading of 16, as the stock rallied by almost 15% this month. Payment services provider Western Union (WU) remains near the top of the list, with a DTR ratio of 15.
Wall Street might be in for a quiet week, as traders will likely focus on Thanksgiving and Black Friday after the crazy election period. Crucial economic releases will also be few and far between, with only the durable goods report and the minutes of the latest FOMC meeting coming out on Wednesday. The Gorilla will keep a close eye on the bond market, as the current “bloodbath” in Treasuries could prove more important for stocks as the post-election frenzy cools down. The price of oil could also be in the spotlight again, with the all-important OPEC meeting being less than two weeks away, and U.S. inventories still rising at a record pace. The Gorilla wishes you a Happy Thanksgiving, and another bullish week for all. Stay tuned!