Wall Street experienced another unusually calm week at this time of the year after what proved to be one of the least volatile months ever for stocks. The light activity is especially surprising in light of the busy economic calendar, the ongoing earnings season, the revealed GOP tax plan, and the announcement of the next Fed Chair. Also, the Federal Reserve had a scheduled meeting on Wednesday, but that failed to excite traders and investors as well. Apple’s successful iPhone X launch, coupled with the company’s bullish earnings report pushed equities to new all-time highs on Friday, as the most valuable public company in the world appears to be well on track for a market cap of $1 trillion.
Economic numbers were on the positive side yet again, but there were some disappointments as well. The government jobs report came in mixed at best, with the unemployment rate ticking lower unexpectedly, but payrolls missing the consensus estimate together with hourly earnings. The ISM manufacturing PMI was also below the consensus estimate, but its non-manufacturing counterpart was much better than expected, new jobless claims hit another cycle low, and consumer confidence surged higher. Jerome Powell’s nomination as the next Fed Chair also boosted stocks, thanks to his “dovish” reputation, as the rally that started in bonds continued throughout the week.
The Nasdaq went from being a laggard to leading the market higher during the earnings season, and Apple’s figures helped the tech index move even higher, although small caps continued to show weakness. The Dow, the S&P 500, and the Nasdaq are still clearly above both their 50- and 200-day moving averages, despite their recent neutral price action. The Russell 2000 is also showing a strong long-term rising trend, but the short-term average is quickly catching up to the benchmark thanks to the consolidation in small caps. The Volatility Index (VIX) dropped to single digits on Friday, getting close to its all-time low again, with no major bearish catalyst in sight to worry investors.
Market internals remain a concern for the Gorilla, as the stellar performance of mega caps continues to mask the slight under-the-hood weakness of the market. The Advance/Decline line is still diverging from the major indices, failing to hit new highs together with them, even as advancing issues outnumbered declining stocks, by a 2-to-1 ratio on the NYSE and by a 3-to-1 ratio on the Nasdaq. The average number of new 52-week highs was a bright spot, as it rose on both exchanges, climbing to 165 on the NYSE, and 156 on the Nasdaq. The number of new lows declined to 33 on the NYSE, while rising to 68 on the Nasdaq in the meantime. Despite the new all-time highs, the ratio of stocks above their 200-day moving average remained very low, finishing the week near 63% again. Short interest took yet another hit as volatility remained extremely low, and the most shorted stocks outperformed the major indices, as bears ran for the exits.
Shares of SunPower (SPWR) surged by more than 20% in two days after the company’s earnings report, and with a short interest of 79%, there must be plenty of shorts left to fuel the rally. RPC (RES) proved its underlying strength, jumping by 10% last week, with the rising oil prices and a short interest of 47% boosting the stock. TransDigm (TDG) is building momentum after hitting a new all-time high in October, and with a days-to-cover (DTC) ratio of 17, there seems to be no place to hide for bears. Current GorillaPick, Extra Space Storage (EXR), is also close to its record high after adding 7% post-earnings, and its DTC ratio of 14 suggests plenty of upside potential.
The successful third-quarter earnings season is drawing to an end, but the likes of Disney (DIS), NVIDIA (NVDA), Priceline (PCLN), and especially Berkshire Hathaway(BRK-A) could still move the market this week. The economic calendar is virtually empty after the recent busy period, with only the preliminary U of M Consumer Sentiment Index coming out on Friday. The Gorilla hopes that the slight internal weakness behind the strong indices won’t be the precursor of a coming correction, as last week’s encouraging price action must be a positive sign for bulls. That said, even if stocks turn lower short-term, the underlying trend and technicals remain clearly positive. Stay tuned!