This year’s Christmas week will likely be remembered for the final “all clear” signal for the “biggest tax cut in history,” one of Donald Trump’s main campaign promises. While some analysts say that the bill is skewed toward corporations and wealthy individuals, the looming success of the President has been a clear boost for equities in recent weeks. As the usual Christmas lull set in toward the end of last week, the major indices are holding on to their lofty yearly gains nicely, trading just below their record highs. On another positive note, small caps have been performing above average recently, and that is usually a bullish sign for the broader market.
While economic numbers were mixed in the last week of the year, the housing market provided clearly positive signals, as building permits, housing starts, and new home sales all beat the consensus estimates. As short-term interest rates have been steadily rising with the help of the Fed, the resilience of the segment is slightly surprising to the Gorilla. The durable orders report painted a bleaker picture of the economy, as core orders unexpectedly declined and the headline number also came in well below the expected level. Weekly jobless claims jumped higher to 245,000, and the final GDP print was a tad worse than expected as well, while the Philly Fed Index posted a surprising spike.
The technical picture remained positive across the board, despite the sideways drift on Wall Street, as the major benchmarks are still showing a strong bullish trend. The Nasdaq, the S&P 500, and the Dow are each above both their 50-, and 200-day moving averages, even as the indicators got a bit closer during the consolidation. The position of the Russell 2000 continued to improve, as small caps have been boosted by the tax deal, as the index is still clearly above both its short- and long-term averages. The Volatility Index (VIX) continues to hover around the very low 10 level, as investors still trust the record long bull market, and hedging activity remains historically low.
Market internals are largely in line with the steadily rising stock prices, and the majority of the most reliable measures ticked higher again, with only a few minor red flags suggesting caution. The Advance/Decline line is showing a positive divergence, as it marched to new highs in the quiet environment, with advancing issues outnumbering declining stocks yet again, 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 rebounded strongly on both exchanges, climbing back to 180 on the NYSE, and 145 on the Nasdaq. The number of new lows edged lower in the meantime, falling to 30 on the NYSE, and 40 on the Nasdaq. The ratio of stocks above their 200-day moving average seems to be stuck near the 64% level, despite the record highs in the indices, and the level of participation is still the biggest concern for bulls here.
Short interest remained very low before the closing of the year, and it seems unlikely that bears will enter the market now following such a stellar period for stocks, and the most shorted names could be in for further gains. SeaWorld (SEAS) broke-out of a consolidation pattern last week, and with short interest standing at 50%, short covering could further boost the stock. The shares of drilling company Diamond Offshore (DO) rose by more than 10% in a week, and the stock is still very high on the list with the highest days-to-cover (DTC) ratio, with a reading of 14. Snap-on (SNA) is also sporting a DTC ratio of 14, and as the stock is trading on a fresh 8-month high, the pressure is mounting on bears.
The shortened last week of the year will be very calm regarding economic releases, and following the happy end of the tax bill saga, investors might be in for a pleasantly boring week on Wall Street. The most-watched indicator of the week, the CB Consumer Confidence Index is scheduled for Wednesday, as well as the pending home sales report, while the Chicago PMI will be released on Thursday. Despite those, trading activity will likely remain very low, and barring an unforeseen geopolitical event, volatility should also be tamed. The Gorilla is glad that everything looks set for further gains in equities in the New Year, as technicals and fundamentals all remain encouraging. Stay tuned for a quiet week!