The mighty bull market hit another historic mark last week, as the Dow crossed the 23,000 level for the first time, and never looked back. IBM’s sizable earnings beat helped the rally in the mega-cap index the most, but the positive surprise by Johnson & Johnson (JNJ) also boosted the benchmark. All of the major indices hit new all-time highs during the week, but the Nasdaq, and especially the Russell 2000, lagged behind the broader market. As quarterly earnings took center stage, geopolitical fears and the slightly disappointing economic numbers were less prominent, especially given the focus on the Fed Chair candidates. The end of the week was highlighted by the Senate’s passing of the 2018 budget that cleared a big obstacle from the tax reform’s way, lifting equities to new highs on Friday.
Economic releases were a mixed bag, reflecting the crucial bullish trend in Treasury yields and the continued modest GDP growth, essentially the symptoms of the “Goldilocks” economy. Industrial production was in line with expectations, while the Philly Fed index showed unexpected optimism in the manufacturing sector, blowing away the consensus estimate in October. The housing market sent mostly worrisome signals yet again, as the rise in short-term yields put pressure on the segment. New jobless claims dipped unexpectedly to 222,000, which is the lowest level in this cycle, as the labor market remains tight, possibly pointing to wage-inflationary pressures on the horizon.
Given the bullish price action, it’s no surprise that technicals remained encouraging across the board, with only a slight deterioration among small caps. The Dow, the S&P 500, and the Nasdaq are still way above their 50- and 200-day moving averages, while the Nasdaq closed just below its record high on Friday. The Russell 2000 continued to lag the broader market in the first half of the week, as it is still consolidating its lofty tax-reform gains, but the strength that the segment displayed on Friday is a positive sign for bulls. The Volatility Index (VIX) surged higher on Thursday; the 30th anniversary of Black Monday, but the brief spike quickly faded away, and the indicator finished the week back below the widely watched 10 level.
Market internals reflect the recent weakness in small caps, as the most reliable measures started showing negative divergences, pointing to a possible correction in the near future. The Advance/Decline line failed to hit a new high for several days in a row, despite the rising indices, although advancing issues still outnumbered declining stocks by a 4-to-1 ratio on the NYSE and by a 3-to-1 ratio on the Nasdaq. The average number of new 52-week highs fell sharply on both exchanges, declining to 170 on the NYSE, and 155 on the Nasdaq. The number of new lows continued to rise in the meantime, climbing to 29 on the NYSE, and 46 on the Nasdaq. The ratio of stocks above their 200-day moving average remained under the 70% level, and the ratio edged even lower during the week, to finish at 68%.
Short interest was little changed in the calm environment, as bearishness remains near record lows, thanks to the historically low volatility and the broad rising trend. Shake Shack (SHAK) continued its recovery last week, posting seven positive days in a row, and with a short interest of 53%, the stock could be in for much more of the same. Ubiquiti Networks (UBNT) is having a highly volatile year so far, but despite the short interest of 44%, the stock is just a few percentage points below its all-time high. Iron Mountain (IRM), one of the stocks with the highest days-to-cover (DTC) ratio with a reading of 18, is also on the verge of a move to new highs, following two encouraging weeks. Microchip Technology (MCHP) also sports a DTC ratio of 16, while the shares of the company are at an all-time high, after rising by more than 50% this year.
Economic releases will be few and far between this week, with only the advance GDP print expected to have a major impact on markets on Friday. After the disappointing housing numbers last week, a positive surprise would be welcomed in new home sales scheduled for Wednesday, while internationally, the European Central Bank’s monetary meeting will be in focus on Thursday. On the other hand, the earnings season will be at full speed, with more than $4 trillion in market cap reporting, including Alphabet (GOOG), Microsoft (MSFT), Amazon (AMZN), ExxonMobil (XOM), and Visa (V). Apart from the quarterly reports, the fate of the tax reform and the likely decision on the next Fed Chair will remain in focus, so the Gorilla expects somewhat increased volatility as the rumor mill will likely heat up. Stay tuned for an interesting week!