Stocks settled down somewhat last week following the wild swings in the first few days of the year. The major indices traded in narrow ranges throughout the week, despite the heightened political uncertainty regarding the alleged Russian involvement in the U.S. Presidential campaign. Treasuries and the Dollar remained in the spotlight, as traders continued to weigh the expected policies of the future administration, while trying to guess the most likely roadmap for the Fed. The Gorilla thinks that the stability of the market is commanding in the face of the fragile sentiment and the negative seasonality, and that the current consolidation could provide a solid base for another leg up in the bull market.
With only a few key economic releases coming out last week, investors were focused more on the speeches of Donald Trump and Janet Yellen before this week’s inauguration on Friday. The economic indicators released provided a mixed bag, as core retail sales were well below the consensus estimate, while the PPI index posted an encouraging reading. The preliminary Consumer Sentiment index was also slightly below expectations, following the post-election jump. According to seasoned traders, the market’s reaction is more important than the economic numbers themselves, and stocks, especially small caps, surged higher following the major announcements on Friday.
Technicals remain clearly bullish, although some of the short-term measures turned neutral amid the consolidation. The major indices are all well above their long-term averages, and the S&P 500 and the Nasdaq closed the week above their 50-day moving averages as well. The Dow slightly underperformed the other benchmarks, while the Nasdaq actually hit another new all-time high on Friday. The Russell 2000 is still below the short-term average, although the small-cap index finished the week on a positive note after a one-month long correction. The Volatility Index (VIX) remained low throughout the week, even after the mid-week spikes lower, as it closed near the 12 level once again.
Market internals made bulls smile last week, as they continued to improve thanks to the strength of the Nasdaq and the healthy late-week bounce in small caps. The Advance/Decline line pushed higher once again, as advancing stocks outnumbered declining issues, by a 2-to-1 ratio on the NYSE and by a 4-to-1 ratio on the Nasdaq. The average number of new 52-week highs was little changed on both exchanges, falling to 118 on the NYSE, while rising to 123 on the Nasdaq. The number of new lows remained low, edging higher to 13 on the NYSE, while declining to 21 on the Nasdaq. The ratio of stocks above their 200-day moving average was stable as well, as it finished the week at another two-month high near 69%.
The list of the most shorted stocks on the NYSE and the Nasdaq was virtually unchanged, as volatility remained low on Wall Street. Drug manufacturer Lannett (LCI) experienced increased activity, as the short interest in the company increased by 10%, to 41% recently, while the stock is down by almost 15% so far in 2017. Short sellers of Wayfair (W) have been running for the door lately, as the stock is up by around 30% since the election, while the short interest in the company fell sharply, from 36% to 30%, in just two weeks. CarMax (KMX) is still near the top of the list of stocks with the highest day-to-cover ratio (DTC) with a reading of 11, despite the 40% rally in the stock since November. Payment provider Western Union (WU) posted a new all-time high this year, despite having a DTC ratio of 15.
Donald Trump will officially take over the Oval Office from President Obama this week, and investors are eager to see how the “new era in U.S. politics” will look in practice, following the unusually violent campaign year. All eyes will be on the European Central Bank on Thursday, as Mario Draghi is expected to react to the Fed’s December rate hike and the FOMC’s hawkish outlook. Traders might be in for a wild ride that day, as the Philly Fed index will also come out just a few hours after the ECB meeting. Before that, the CPI report will be released on Wednesday. Since stocks got through the rate hike without a major correction, the Gorilla is looking for a positive week and, finally, a bullish January. Stay tuned!