Despite the bearish downward drift that dominated the stock market in the last week of the year, this week was nothing short of stellar for investors, as the major indices rose in all sessions. The Nasdaq gained around 4%, after lagging the other benchmarks for several weeks. The Dow also advanced significantly, topping 25,000 for the first time, and the S&P 500 was also up by almost 3%. All of the benchmarks are trading at all-time highs, and with small caps being near record levels too, the Gorilla is delighted with the breadth of the New Year’s rally. Friday’s bullish session is especially encouraging given the negative surprises of the government jobs report and the non-manufacturing PMI, which sent Treasuries on a rollercoaster ride.
Diving deeper into the jobs report, payrolls only rose by 148,000, and coupled with the negative revision of last month’s hourly earnings number, the release was far from rosy. That said, the first week of the year had its bullish moments as well, as the manufacturing PMI shot higher after two weaker readings, while unemployment remained very low. The FOMC meeting minutes showed a divided Fed, but the rising trend in short-term yields remained intact, while long-dated bonds also took a hit. As inflation continues to be the main concern of the Central Bank, a slower rate hike schedule could give a boost to stocks going forward, even as economic growth remains robust.
The technical picture looks much better than a week ago, thanks to the healthy post-holiday rally, as the key benchmarks are still clearly trending higher. The Dow, the S&P 500, and the Nasdaq are all well above both their 50- and 200-day moving averages, while also opening the week at fresh record highs. The Russell 2000 lost some of its relative strength compared to the broader indices, as small caps finished slightly off their all-time highs, remaining above their short- and long-term moving averages. The Volatility Index (VIX) crashed on the first two sessions of the year as it dipped below the 9 level, closing in on its record low again, although it finished slightly higher on Jobs Friday.
Market internals improved across the board amid the broad rally, and the Gorilla hasn’t noticed any major negative divergences in the most reliable measures. The Advance/Decline line continues to march higher to new bull market highs, in line with the major indices, and it remains one of the best-looking indicators out there. The average number of new 52-week highs continued to rise rapidly on both exchanges, climbing to 230 on the NYSE, and 250 on the Nasdaq. The number of new lows fell even lower in the meantime, to 26 on the NYSE, and 22 on the Nasdaq. The ratio of stocks above their 200-day moving average finally provided bulls something to cheer about, although the 68% reading is still not sky high, it’s much better than the dismal numbers in recent months.
Short interest hit historic lows on Wall Street after the cautious Fed meeting minutes, and as the faith in the bull remains strong, bears will likely remain in hibernation this winter. Overstock.com (OSTK) remained one of the leaders of the rally, hitting a new all-time high last week, and the short interest of 51% means that a lot of shorts could be looking for the exits soon. Ubiquiti Networks (UBNT) has been on a similar path, also posting record highs recently, and although short interest is “only” at 42%, it could be still enough to trigger a short squeeze. National Oilwell (NOV) has been riding the wave of rising crude oil prices lately, and it recently popped up on the list with the highest days-to-cover (DTC) ratios, with a reading of 11, signaling a growing pressure on shorts.
The year started out with a significant increase in trading activity, as per usual, and the Gorilla thinks that more busy days are ahead. While the economic calendar will be virtually empty in the first half of the week, the Purchasing Price Index will be out on Thursday, and Friday will see the most awaited releases again, namely the retail sales and Consumer Price Index (CPI) reports. Given the Fed’s continued focus on inflation, the CPI will be closely-watched by both stock and bond investors, and a major surprise could have a huge impact on interest rate expectations. Despite that, the Gorilla thinks that with the solid technicals in mind, stocks could withstand even a sizable blow. Stay tuned for an exciting week!