Stocks seemed unstoppable in the first half of the past week, as the major indices continued their uninterrupted advance to historic highs. The last couple of days of the week saw a shallow correction on Wall Street, but the technical damage is limited, despite the slightly alarming weakness in small caps. The new POTUS had another noisy week, but investors mostly ignored the political skirmish and instead focused on the details of Mr. Trump’s highly anticipated tax proposal. The earnings season continued with the likes of Pepsico (PEP) and Cisco (CSCO) releasing their quarterly figures, and the largest players reported highly encouraging numbers. AIG Group (AIG) and Kraft Heinz (KHC) were among the notable losers of the week. The insurance giant missed expectations by a relatively large margin, while Kraft recovered to new highs as rumors surfaced about a mega-merger with Unilever (UL).
Economic numbers were back on track last week following a less bullish period, as all of the major indicators surprised on the upside. Retail sales were especially strong in January, which certainly helped consumer-related shares throughout the week. The blowout Consumer Price Index (CPI) also gave a huge boost to rate hike expectations, as a lot of analysts now think that the next tightening is “baked in the cake.” That said, the major indices reacted well to the releases, and the Gorilla is glad that good news is actually good news again for stocks. That is a much-welcomed sign of normalization following the strange period of quantitative easing.
Technicals are still bullish across the board, and even the underperforming segments of the market remain in advancing trends, amid the mixed price action. The major benchmarks are still all in undoubtedly bullish technical positions, with the Nasdaq, the Dow, and the S&P 500 all being clearly above their 50 and 200-day moving averages. The Nasdaq is still the top performer among the indices, and that is usually a positive sign for bulls according to seasoned traders. The Russell 2000 is also above both its long and the short-term averages, despite the slightly deeper correction in small caps. The Volatility Index (VIX) surged higher on Wednesday and Thursday, while getting close to its monthly highs. The VIX finished the period well below the weekly high at around 11.75.
Market internals remained strong despite the slight dip in the second half of the week, with only a few measures showing slight negative divergences due to the less than stellar performance of small caps. The Advance/Decline line edged higher once again, as advancing issues outnumbered declining stocks 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 continued to grow on both exchanges, rising to 215 on the NYSE, and 169 on the Nasdaq. The number of new lows dipped even lower, falling to 10 on the NYSE, and 26 on the Nasdaq. The ratio of stocks above their 200-day moving average was the least bullish of the indicators, as it retreated somewhat from its recent highs, and finished the week just above 71%.
Short interest continued to plunge on Wall Street, as bears were hit hard by the relentless rise in prices, despite the “pockets” of weakness that the Gorilla noticed last week. Short interest in Weight Watchers continued to rise in recent weeks, and it is now above 65%, although the price of the stock remains stable. INSYS (INSY) saw increased volatility last week, as shares of the company jumped by 15%, with the short interest still being at 64%. Air delivery company C.H. Robinson (CHRW) continued its rise on the list of the stocks with the highest day-to-cover ratio (DTC), with a reading of 13, even as the stock registered a highly bullish week. Short sellers of CarMax (KMX) are still feeling the heat, despite the drop on Friday, as the DTC ratio is still at 11, and the stock continues to drift towards its all-time highs.
The Gorilla thinks that although the contradictory performance of technology stocks and small caps could result in a deeper correction in the coming weeks, the overall picture remains positive for bulls. Economic numbers remain strong, and earnings have been overwhelmingly favorable thus far. This week will shed more light on the state of some of the crucial companies in several segments, such as Wal-Mart (WMT), Home Depot (HD), and Tesla (TSLA). The economic calendar is virtually empty this week, with only the FOMC meeting minutes providing some insight into the likely future of the Fed’s monetary policies. That said, Mr. Trump could surprise traders once again, especially if he reveals more details about the crucial tax-reform. Stay tuned for another interesting week on Wall Street!