The big day came last week, as the Federal Reserve finally raised its benchmark interest rate to a, still historically low, 0.5%. The tightening move was the first one since last December, but now it seems it won’t be another “orphan” hike, and rates will continue to normalize in the coming year. Despite the expected move, the Fed still surprised the market with a slightly “hawkish” outlook for 2017. Stocks stayed on course after the slightly negative surprise, as the Nasdaq finally outperformed the broader market. Small caps, the stars of the post-election rally, were slightly weaker last week, but the major indices all performed encouragingly this week.
Economic indicators remained in line with the “moderate growth” scenario, with most of the numbers coming in near the consensus estimate. The Philly Fed Index was the standout release of the week, as the crucial benchmark leapfrogged expectations with a reading of 21.5. Retail sales remained stable in the first part of the holiday season, while the housing market showed some signs of early weakness, probably as the result of rising yields. This week’s most important event might be the Bank of Japan’s monetary meeting, as Mr. Kuroda is now stuck between a rock and a hard place, with his fellow central bankers taking tightening steps in the past two weeks. After the BOJ decision on Tuesday, durable goods orders and the final GDP print will be released on Thursday, closing the relatively calm week before Christmas.
Technicals remained comfortably on the bullish side last week, although the Gorilla will keep an eye on small caps following the slight correction in the segment. The major indices are still trading above both their 50- and 200-day moving averages, and the Nasdaq caught up to the Dow and the S&P 500 following a relatively strong week. The Russell 2000 finished lower after a spectacular month, but it remains the best performing benchmark since the victory of Mr. Trump. The small cap index is well above the rising long-term average, despite finishing right at the short-term indicator. The Volatility Index (VIX) remains at historically low levels and the slight negative divergence that the Gorilla noticed previously vanished following the Fed meeting. The VIX closed the week just above the 12 level once again.
Market internals deteriorated somewhat, as the correction in small caps dragged some of the most important measures down. The Advance/Decline remained bullish amid the mixed price action, as advancing stocks still outnumbered declining issues, by a 3-to-1 ratio on the NYSE and by a 4-to-1 ratio on the Nasdaq last week. The average number of new 52-week highs fell sharply on both exchanges, declining to 165 on the NYSE and 194 on the Nasdaq. The number of new lows rose significantly in the meantime, jumping to 80 on the NYSE and to 57 on the Nasdaq. The ratio of stocks above their 200-day moving average also got hit amid the broad correction, dipping below 65% again, and finishing the week at 63%, down 4 pps from the previous week.
The improvement on the list of the most shorted stocks on the NYSE and the Nasdaq slowed down thanks to the consolidation, with no meaningful changes among the leading issues after the huge shift following the election. Shake Shack (SHAK) moved even higher on the list, as the short interest in the company rose to 75%, despite the 30% rally in the stock since the October lows. Short sellers of Fitbit (FIT) are also smelling blood, as the short interest almost hit 50% recently, with the stock falling to a new low almost on a daily basis. The list of stocks with the highest day-to-cover ratios (DTC) also remained bullish last week. Verisign (VRSN) is still clearly on the top, with a DTC ratio of 17. Navigation services provider Garmin (GRMN) showed up in the top five with a DTC ratio of 12, although the stock is still just 10% below its all-time high.
With only two weeks left in this extraordinary year, the Gorilla thinks that Wall Street might see some quiet days following the wild weeks after the Presidential election. That said, with the technicals lining up nicely, some traders think that the current advance might continue, and further all-time highs could be in store for the major indices. Barring a huge surprise from the electoral college, the political landscape should remain stable for the rest of the year, and bulls might really enjoy a peaceful period to conclude the rollercoaster ride that 2016 was. The Gorilla wishes all happy holidays. Stay tuned!