Quiet trading continued in the last week of 2016, as trading volume was weak as usual during the holiday period. The major indices turned lower in thin trading, as international worries and political tension overshadowed the mostly positive economic numbers. The diplomatic bout with Russia weighed heavily on stocks and the dollar in the second half of the week. The huge rally since the Presidential election pushed the major indices into a clearly overbought stance, so a brief consolidation phase is just natural. The Gorilla thinks that with small caps and financials still performing well the long-term bullish trend seems to be safe for now.
Economic releases were few and far between following the Christmas weekend, but the most awaited indicators showed no worrying signs for bulls. The CB consumer confidence index continued to surge higher after the post-election jump, coming in at 113.7; a reading not seen since 2001! New jobless claims remained at a historical low as well with a weekly number of 265,000. The “leading indicator” of the labor market is still well below the 300,000 threshold that would be considered an early warning sign for the broader economy. Treasury yields also turned lower after the “Trump-rally,” as bonds ended the year virtually unchanged, albeit after an epic rollercoaster ride.
Technicals deteriorated slightly thanks to the recent consolidation, but the overall picture remains clearly bullish. The Dow, the S&P 500 and the Nasdaq all dipped below their 50-day moving average toward the end of the week, but all three benchmarks are still well above their rising 200-day averages. On a positive note, the Russell 2000 outperformed the broader indices once again, although the benchmark also finished between its short- and the long-term moving averages. Small caps have been leading the rally from the November lows, and the Gorilla thinks that their resilience gives even more reason to think that the bullish trend is still intact. The Volatility Index (VIX) crept higher from its fresh 2-year low last week, finishing near the monthly high of 14 on Friday.
Market internals remained mixed in the last week of 2016, but some of the key measures actually ticked higher, despite the negative price action. The Advance/Decline line rose slightly amid the correction, as advancing stocks outnumbered declining issues, by a 3-to-2 ratio on the NYSE and by a 4-to-3 ratio on the Nasdaq. The average number of new 52-week highs continued to decline sharply on both exchanges, falling to 76 on the NYSE and 102 on the Nasdaq. The number of new lows also dwindled, declining to 18 on the NYSE and 40 on the Nasdaq. The ratio of stocks above their 200-day moving average was unchanged once again, closing at 63%, as the decline in the major indices failed to drag the indicator lower.
The list of the most shorted stocks on the NYSE and the Nasdaq was barely changed, as most traders took a step back during the holiday-shortened week, after the wild period following the election. Weight Watchers (WTW) was among the more active stocks, with the short interest in the company rising to 51% following a 25% jump in the stock in December. Cloud services provider Twilio (TWLO) remains high on the list, with a short interest of 45%, as the stock keeps drifting lower in a volatile fashion. Data storage provider Teradata (TDC) popped up on the list of the stocks with the highest day-to-cover ratios (DTC), after three wild months of trading, with a reading of 11. Harley-Davidson (HOG) also sports a DTC ratio of 10, despite a hefty 50% rally since July.
After the quiet holiday period, the Gorilla expects a return to normal trading activity this week. Job’s Friday will probably bring the most volatile trading of the holiday-shortened week, with the ISM manufacturing and non-manufacturing PMIs also coming out on Tuesday and Thursday, respectively.
The month of January brought major sell-offs in recent years, but the market proved resilient to all kinds of negative news recently, giving bulls a solid base for optimism. The major indices start the New Year near their respective all-time highs, despite the recent correction, and the planned four rate hikes by the Federal Reserve in 2017. The Gorilla wishes all a great start for 2017. Stay tuned!