March 20, 2017

Traders experienced a strange, two-faced week on Wall Street, as all eyes were focused on Janet Yellen and Co. once again. The Fed lived up to expectations and raised its benchmark interest rate by 0.25% following the similar move in December. Despite the tightening step, the Central Bank was far from being hawkish, according to most investors, with no indication of an accelerated rate hike schedule that some feared. The major indices reacted in a clearly bullish way, recovering some of their recent losses, with the Nasdaq hitting a new all-time high. Bulls were also delighted to see the late-week strength in small caps, as the struggling segment finally started to catch up with the broader market following the Fed announcement.

Although some analysts argued that the rate hike was not in line with the performance of the economy, last week’s releases were overwhelmingly positive yet again. The PPI and CPI indices, the Philly Fed Manufacturing Index, and the U of M Consumer Sentiment Index all beat expectations. The headline number of the retail sales report was disappointing, but with the positive revision of the prior month’s reading, consumption is still a bright spot. Rising interest rate expectations might be behind the slight weakness in the housing market that the lower-than-expected number of building permits pointed out. That said, housing starts surprised to the upside, while industrial production was below its expected level in February.

Technicals improved across the board thanks to the bounce in the second half of the week, as the Nasdaq continued to provide strong leadership for the broader market. The Dow and the S&P 500 recovered above their 50-day moving averages, and both benchmarks remained well clear of their rising long-term indicators as well. The Nasdaq posted a marginal new high while staying handily above both of its moving averages. The Russell 2000 also pushed higher, surpassing both averages, although the declining 50-day indicator crossed below the 200-day one in a bearish fashion last week. The Volatility Index (VIX) reflected the positive reaction to the Fed decision, as it fell significantly and stands close to its February low near 11.

Market internals also paint a more positive picture after the much-needed rally in small caps. Some of the key measures are still showing weakness, but the Gorilla remains confident regarding the health of the bull market. The Advance/Decline line rose again following a neutral period, as advancing issues outweighed declining stocks, by a 2-to-1 ratio on the NYSE and by a 3-to-1 ratio on the Nasdaq. The average number of new 52-week highs surged higher on both exchanges, rising to 119 on the NYSE, and 140 on the Nasdaq. The number of new lows fell encouragingly, dropping to 37 on the NYSE, and 45 on the Nasdaq. The ratio of stocks above their 200-day moving average also bounced back after the scary decline, and it finished near the, still low, 68% level on Friday.

Short interest remains near all-time lows on Wall Street, as bears have been hurt badly in the relentless rally of the recent months. Home furnishing company RH Inc. (RH) might be ready for a major short squeeze following the 70% decline last year, as the stock is up by 20% only in March, and it still has a short interest of 45%. GoPro (GPRO) probably scared some bears last week, as it recovered from its fresh new all-time lows in a spectacular fashion, despite having a short interest of 48%. Iron Mountain (IRM) is close to the top of the list of the stocks with the highest days-to-cover ratio (DTC) of 13, while the stock continues to experience wild swings this year. Medical equipment producer Patterson (PDCO) is recovering well after the bloodbath in November, but its DTC ratio is still at 11, and shorts might already be feeling the heat.

March Madness is finally here, and the hype might divert some attention away from the market after the much-awaited FOMC meeting that didn’t provide any real surprises. With only the durable goods report coming out Friday, traders might be in for a relatively quiet week on the economic front as well. The controversial budget and healthcare propositions of the new administration will likely continue to keep the media busy in the coming weeks, but so far, investors still seem to be positive towards the reforms. The Gorilla thinks that this period might be ideal to judge the underlying strength of the rally, given the lack of major events and the recent consolidation. With that in mind, stay tuned for an interesting and promising week!