New all-time highs in the major indices and record low levels in the Volatility Index (VIX)… It might sound like a broken record, but one that is music to the ears of bulls, as despite the political troubles, persistent geopolitical fears, the last rate hike of Fed Chair Janet Yellen, and the mixed economic numbers, the Santa Claus rally arrived without delay. As the world focused on Bitcoin mania, stocks were mostly moved by the still ongoing tax-bill saga, and the UK’s struggle with the Brexit process. While cautious trading around the Fed-Day and the European Central Bank’s meetings made some investors worry, buying pressure in the final session of the week propelled equities to uncharted heights yet again.
The PPI kicked off last week with a positive surprise, pointing to healthy growth on the supply side of the economy, but the more watched Consumer Price Index (PPI) cooled down growth expectations before the Fed meeting on Wednesday. Janet Yellen’s last FOMC gathering delivered the rate hike that the market expected, and the committee reiterated that it expects three tightening moves next year, even as the long-term prospects of the economy were slightly downgraded. The blowout retail sales report helped to restore confidence on Thursday, while the weaker-than-expected industrial production didn’t stop the rise in short-term yields either on Friday, and the collapse of the yield curve continued.
The technical picture improved thanks to Friday’s rally, and the Nasdaq’s “break out” could be the start of another healthy upswing following the recent brief consolidation. The tech benchmark, the S&P 500, and the Dow are all at fresh all-time highs, while still being well above both their 50- and 200-day moving averages, signaling a strong underlying trend. Small caps are also in a better shape than they were at the beginning of the month. And although the Russell 2000 is still shy of its record high, the index is also above both of its key indicators. The VIX finished yet another week in single digits, despite the usual pre-Fed hedging spike, and the holiday season could very well bring even lower levels in the “Fear Index.”
Market internals improved, thanks mostly to the bounce in small caps, and although some of the measures are still showing suspicious readings, the overall picture remains encouraging. The Advance/Decline line continued higher together with the key benchmarks, as advancing issues outnumbered declining stocks, by a 4-to-1 ratio on the NYSE and by a 6-to-1 ratio on the Nasdaq. The average number of new 52-week highs continued to decline on both exchanges, falling to 113 on the NYSE, and 100 on the Nasdaq. The number of new lows also fell, edging lower to 32 on the NYSE, and 54 on the Nasdaq. The ratio of stocks above their 200-day moving average improved somewhat amid the bullish price action, but the measure still only stands at the very low 64% level, despite the record highs.
It’s no surprise that before the approaching holiday lull and following such a stellar year for stocks, bears even reduced their already meager positions, pushing short interest lower across the board. Wayfair (W) had another bullish, albeit volatile week, and the stock finished almost 10% higher, with short interest edging even higher, to 60% in the meantime. Hormel Foods (HRL) might be ready for another move higher, adding to the lofty gains of November, as the stock is still very high on the list with the highest days-to-cover (DTC) ratios, with a reading of 13. The DTC ratio of Helmerich & Payne (HP) has been steadily rising lately, as the stock drifted sideways, and now, with the indicator at 14, a bullish move wouldn’t surprise the Gorilla.
The recent weakness in the Nasdaq seems to have ended, small caps are also back on track, and with only a handful of major releases scheduled for this week, the Gorilla sees a good chance for a quiet and positive period on Wall Street. The GDP print scheduled for Thursday might be the most awaited economic number, but before that, building permits and housing starts will come out on Tuesday, and Friday will see the release of the durable goods, new home sales, and personal spending reports. As trading activity will likely decline significantly in last two weeks of the year, investors could sit back a bit and enjoy the nice profits of one of the best years for stocks in recent memory. Stay tuned!