Before Friday’s reveal regarding Michael Flynn’s plea agreement and testimony, stocks continued their juggernaut to new all-time highs, despite a slight weakness in the previously leading tech names. The spike in volatility and the sudden sell-off in equities didn’t cause major technical damage, but the rally that carried the Dow above 24,000 might face a test in the coming days, although the long-term trend is not in any danger.The S&P 500 also scored a new record high as it rose for the second week in a row, but the Nasdaq closed the week in the red, while small-caps also lost some of their relative strength on Friday.
Economic numbers were overwhelmingly positive last week, with only the ISM manufacturing PMI missing the consensus estimate by a tad. That said, the measure continued to signal healthy growth in the industrial segment, with the Chicago PMI adding to the positive signs too. New home sales and pending home sales confirmed the recently published blowout numbers from the housing market, and given the progressively rising Treasury yields, the Gorilla is impressed by the encouraging performance of that key sector. The strong Consumer Confidence Index number coupled with reportedly lofty Black Friday sales to push consumption-related stocks higher too, while Janet Yellen’s dovish testimony also boosted risk assets in the later half of the week.
The technical picture continues to reflect the ongoing broad rally, as all of the major indices are still strongly trending higher, with the key indicators also being bullish. The S&P 500 and the Dow moved even further away from their short- and long-term moving averages, although the Nasdaq got closer to them as a result of its relative weakness. The Russell 2000 touched its 50-day moving average during Friday’s spike lower, but the small-cap index closed the day near its all-time high after the strong bounce. The Volatility Index (VIX) drifted higher throughout the period, and it briefly hit a new 3-month high amid the late-week selloff, but the closing reading of 11 is still very low historically.
Market internals were stable amid the mixed price action, but the improvement of the recent weeks definitely stalled, and the Gorilla will keep an eye on the most reliable measures this week. The Advance/Decline line continued higher together with the major benchmarks, as advancing issues outnumbered declining stocks, by a 4-to-1 ratio on the NYSE and by a 2-to-1 ratio on the Nasdaq. The average number of new 52-week highs edged higher on both exchanges, climbing to 226 on the NYSE, and 228 on the Nasdaq. The number of new lows slightly increased in the meantime, rising to 49 on the NYSE, and 37 on the Nasdaq. The ratio of stocks above their 200-day moving average pulled back from its recent highs near 65%, and even those low levels were a bit worrisome, so the negative divergence is still apparent.
Wall Street experienced an epic short squeeze thanks to the recent dovish change in the tone of the Fed’s messages, and bears continued to get burned amid the string of new all-time highs. SeaWorld Entertainment enjoyed a healthy rally throughout the week, and given the very high short interest of 52%, the stock could be ready to turn the tide after a rough year for bulls. Snap-on (SNA) popped up on the list with the highest days-to-cover (DTC) ratios with a reading of 14, while the stock surged to a new 7-month high last week. Helmerich & Payne (HP) seems to be resuming its rally too after a brief consolidation period, and the DTC ratio of 15 might be a key bullish catalyst.
The Gorilla thinks that domestic and international politics continue to pose the biggest risks to the raging bull market, although a tax deal this year could easily provide the basis of a solid Santa Claus rally, and Friday’s successful Senate vote makes a final bill very likely. Small caps might shine once again, as the tax cuts favor that the segment the most, and the Russell 200 has been very sensitive to the bill’s “saga” this autumn. North Korea launched another ballistic missile last week, but for now, investors seem to ignore the growing threat of Kim Jong Un’s regime. Wall Street is in for two more busy weeks regarding economic releases before the year-end lull, with the ISM non-manufacturing PMI and the government jobs report being on the menu this Tuesday and Friday respectively. With all those in mind, stay tuned for an interesting week!