After a week of confusion and steep losses, driven by a surge in volatility and the subsequent collapse of several short-volatility strategies, the bull market returned to Wall Street with a bang. The major indices jumped by more than 5% from the recent correction lows. The Nasdaq led the way higher, while the Dow and the S&P 500 followed the tech benchmark closely. The latest twist in the Russia-Gate caused a late-day slump on Friday, preventing a clean sweep for the indices for the week, but the relative strength in small caps still made the Gorilla smile. On an important note, Jerome Powell, the new Fed Chair reassured investors that the Central Bank is keeping an eye on financial stability, which played an important part in improving sentiment.
All eyes were on the CPI index and the retail sales report, as the signs of inflation, which triggered a surge in rates across the yield curve, were widely blamed for the selloff. The sizable beat in consumer prices caused a quick spike lower in equity futures on Wednesday thanks to the heightened expectations. That didn’t stop the stampede of bulls, and the rally continued after the brief pause. That said, Treasury yields kept rising, while retail sales missed the consensus estimate by a wide margin, and some analysts pointed out the risk of “stagflation,” after the releases. Industrial production also declined unexpectedly in January, while the Philly Fed index came in better-than-expected. The outlook still looks bright for the manufacturing segment, and the housing market also provided a much-needed positive surprise on Friday.
The technical picture is much brighter than a week ago, but despite the healthy bounce, there are still signs that the correction could continue in the coming weeks. While the Nasdaq, the best forming major benchmark is back above its 50-day moving average, the Dow and the S&P 500 are stuck between their 50- and the 200-day averages. On a positive note, small caps stopped lagging behind the broader market, and although the Russell 2000 is also below its short-term moving average, it jumped well above its long-term measure last week. The Volatility Index (VIX) is still in focus, although it’s now well below its peak (above 50!), and while the current level of 20 is still high, it’s far from being catastrophic.
Market internals improved significantly, in line with the bullish price action, and the Gorilla is glad that no major negative divergences emerged during the rally. The Advance/Decline line recovered well after its collapse, as advancing issues heavily outnumbered declining stocks, by a 7-to-1 ratio on the NYSE and by an 8-to-1 ratio on the Nasdaq. The average number of new 52-week highs remained very low despite the bounce, edging lower to 34 on the NYSE, while rising to 46 on the Nasdaq. The number of new lows declined sharply in the meantime, falling to 66 on the NYSE, and 62 on the Nasdaq. The percentage of stocks above their 200-day moving average shot higher encouragingly after the scary plunge below 50%, and although the current level of 57% is still not stellar, the indicator is on the right track.
Short interest collapsed, thanks to the largest short squeeze since the election scare, as a lot of bears got caught off guard by the persistent buying pressure last week. As most-shorted stocks outperformed the major indices, Carvana (CVNA) was among the top shares of the week, gaining almost 20%, thanks, in part, to the sky-high short interest of 54%. Match Group (MTCH) continued to deliver great returns, obliterating its prior all-time high, backed by a short interest of 50%. Current GorillaPick, Garmin (GRMN), also came back to life, completing its lengthy recovery and hitting a new all-time high too, and with a days-to-cover (DTC) ratio of 11, a lot of shorts might still be there to fuel the rally.
While stocks are not out of the woods yet regarding the short-term outlook, the strong, broad rally that followed the “Volatility Apocalypse” has to be an encouraging sign for bulls, especially given the accompanying improvement in market internals. The Gorilla will be curious to see if the major indices will re-visit the crash lows or not, but in any case, the long-term trends are intact, and fundamentals remain solid. Economic numbers will be few and far between during the upcoming holiday-shortened week, with the release of the FOMC’s meeting minutes clearly being the most-awaited event, considering the level of attention on yields. With that in mind, technical levels and the moves in the VIX could still be driving price action on Wall Street. Stay tuned!