Stocks probably entered the next phase of the ongoing bull market last week, following a lengthy consolidation period. Traders cheered the historic 20,000 milestone in the Dow, as the first week with the new President saw a healthy rally on Wall Street. Donald Trump’s first few days were far from calm, with several controversial decisions and a hard-line approach towards international trade relations. That said, the market ignored the fireworks, and the major indices surged to new highs once again, despite the slight underperformance of small-caps. The Gorilla was pleased to see that the recent correction resolved in a bullish way, even in the face of the decisively negative seasonality.
Economic numbers were less encouraging last week, although there were only a few crucial releases coming out that didn’t change the “moderately bullish” overall picture. The weakness in exports weighed on the worse-than-expected quarterly GDP print, while durable goods orders disappointed, despite the recent jump in order expectations. New jobless claims jumped higher unexpectedly, as they rose above 250,000 for the first time in a month, although the current levels are still well in line with an ongoing economic expansion. That said, the Gorilla will keep an eye on the uptick in new claims, as it might be an early sign of weakness in the labor market.
Technicals improved substantially in the second half of the week, and the major indices are back to an “all clear” state following the recent consolidation. The Dow, the S&P 500 and the Nasdaq are all trading above their long- and short-term averages, as the technology benchmark continued to spearhead the advance. The Dow also outperformed the broader market after a period of weakness, while the Russell 2000 continued to lag the major indices, failing to hit a new high last week. The Volatility Index (VIX) approached its all-time lows, despite the fears regarding Mr. Trump’s first decisions in the Oval Office. The VIX dipped below 11 last week and closed at a new 5-year low, with a reading of 10.50.
Market internals remained supportive of the bullish case, as the strength of Nasdaq spread to the broader market, although with some notable “pockets” of weakness. The slightly lagging Russell 2000 weighed on the performance of the Advance/Decline line, but advancing issues still outnumbered declining stocks, by a 3-to-1 ratio on the NYSE and by a 5-to-1 ratio on the Nasdaq. The average number of new 52-week highs surged higher on both exchanges, reflecting the broad rally, jumping to 196 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 recovered amid the bullish price action, rising back above the 69% level towards the end of the week, despite the relative weakness of small-cap stocks.
Short interest continued to hit multi-year lows last week, amid the major technical “breakout” of the major indices. The list of the most shorted stocks on the NYSE and the Nasdaq continued to be more active than the broader market, especially with regard to the energy segment. Short interest in RPC Energy (RES) rose by 5%, back above 55% once again, although the stock got close to hitting a new all-time high. Shorts also increased their positions in EP Energy (EPE), to 49%, while the stock declined by more than 10% last week. Air freighter C.H. Robinson (CHRW) experienced increased short activity, as it jumped higher on the list of the stocks with the highest day-to-cover ratios (DTC), with a reading of 12. The DTR ratio of Garmin (GRMN) is now the second highest, as it increased to 15 recently, while the stock has traded sideways since August.
Traders should expect another interesting week on Wall Street, as the economic calendar will be way busier, and Mr. Trump’s plans will continue to shape up. The Federal Reserve will hold its next scheduled meeting on Wednesday, but analysts don’t think that another rate hike is in the cards just yet. The January non-farm payrolls report will come out on Friday as usual, together with the ISM non-manufacturing PMI. The manufacturing PMI will also be released on Wednesday, while the CB consumer confidence index is scheduled for Tuesday. The Gorilla thinks that given the slew of economic data, volatility might increase this week, but bulls have all the reasons to remain positive. With that in mind, stay tuned for a busy week!