The red flags that popped up in recent weeks led to a slight decline at the beginning of the week, but the market gathered encouraging strength later on. The major indices finished little changed after the pullback, and the Gorilla was glad to see the relative strength of the Nasdaq and small caps, which usually signal a healthy risk appetite among investors. The rally was fueled by the progress made with the GOP’s tax bill, slightly better-than-expected economic releases, and a rebound in high-yield corporate bonds. So-called junk bonds have been making headlines, as they hit eight-month lows thanks mostly to the rising short-term yields.
Economic numbers were back on track after a less than stellar period, but not everything was rosy, as new jobless claims increased substantially, the Philly Fed Index came in a below expectations, and core retail sales were also disappointing. On the other hand, the headline number of the retail sales report beat expectations, as did industrial production, while the housing market also posted some encouraging figures, as both building permits and housing starts surged. Near-term Treasuries continued their steady decline, as traders increased their hawkish monetary bets, but the long end of the yield curve is still less promising, and the “flattening” of the curve remains the main topic.
The technical picture remained overwhelmingly positive, and the late-week rally pushed the major benchmarks away from the crucial moving averages that got closer during the brief dip. The Dow, the S&P 500, and the Nasdaq are now all well clear of their 50- and 200-day averages, and the tech index is just a tad off its record high despite its recent weak period. The Russell 2000 shot back above both its short- and long-term moving averages after leading the market lower, which could point to a broad-based recovery. The Volatility Index (VIX) followed the same path for the third week in a row, as it spiked higher early on, hitting a new two-month high, but finished near 11 once again.
Market internals bounced back thanks to the strength in small caps, and most of the reliable breadth measures improved substantially. The Advance/Decline line surged higher, although the previous highs are still well above the current levels, even as advancing issues outnumbered declining stocks by a 3-to-1 ratio on the NYSE and by a 4-to-1 ratio on the Nasdaq. The average number of new 52-week highs drifted lower on both exchanges, falling to 105 on the NYSE, and 98 on the Nasdaq. The number of new lows increased in the meantime, climbing to 91 on the NYSE, and 79 on the Nasdaq. The ratio of stocks above their 200-day moving average finally turned higher as the most worrisome indicator jumped back above 60%, from its five-month low thanks to the healthy rally.
The most shorted stocks outperformed the broader market, as volatility collapsed in the second half of the week, and the level of bearishness remains near record lows. Lannett (LCI) is in a promising technical pattern after its recent strong rally, and with a short interest of 54%, there is surely more fuel left in the tank. Gogo Inc. (GOGO) has been under pressure in recent months, but the 20% advance of the past two weeks coupled with a short interest of 48% might mean that a reversal is imminent. Verisign (VRSN), the leader of the list with the highest days-to-cover (DTC) ratios hit yet another new all-time high, and with its DTC still at 19, bears are in for a rough ride. Current GorillaPick, ResMed (RMD), is also squeezing shorts, as the stock is trading very close to its record high, while its DTC ratio is still at 14.
This week might prove to be the least volatile one of the month, and not just because the Thanksgiving holiday, as there will be only a few economic numbers released. Wednesday will be the busiest day by far, as the closely-watched durable goods report will be released, while the minutes of the previous FOMC meeting will also be published. Apart from that, only existing home sales are scheduled for Tuesday, while the shortened Friday session will likely be very quiet. That said, given the tensions in the Middle East and the ongoing tax bill debate, things can get volatile quickly again, although the recent price action looks promising to the Gorilla. Stay tuned!