The bull market in equities continues without interruption, despite some previous warning signs, and the major indices are all at or near all-time highs again after the holiday-shortened week. Large-cap tech names are still at the forefront of the rally, with the Nasdaq leading the way higher. That said, the S&P 500 was the benchmark that made headlines on Black Friday, as it breached the 2,600 level for the first time, with the Dow lagging its peers this time around. As geopolitical troubles and political tensions took the backseat, volatility approached record lows yet again, with the dovish Fed minutes helping the risk-on sentiment as well.
Besides the meeting minutes, economic numbers were generally in line with expectations, and the flattening of the yield curve that some analysts call a recessionary warning, paused last week. The soon to be ex-Fed Chair Janet Yellen expressed her concerns regarding the persistently low inflation that might not be a transitory thing, and it is causing a sharp dip in the dollar. Existing home sales were slightly above expectations in October, which was a much needed positive surprise from the housing market given the rising trend in yields. The headline number of the durable goods report was a sizable disappointment, but the more reliable core measure was in line with the consensus estimate, as the industrial segment remains on track.
The technical picture is still bullish across the board, and thanks to the strength in small caps, the Gorilla would be hard pressed to note any major red flags. The S&P 500 and the Nasdaq closed the week at new record highs, but the relatively weak Dow is also way above both its 50- and 200-day moving averages. The Russell 2000 surged higher after recovering from a brief correction, and the small-cap index also hit a new all-time high, helping the broad rally on Wall Street. The Volatility Index (VIX) flash crashed on Friday, and although it recovered from its low, it still finished the week in single digits, as hedgers removed their bets after the Fed minutes.
Market internals continued to recover, boosted mainly by the small-cap rally, and all of the most reliable measures improved. The Advance/Decline line hit a new bull market high together with the major indices, as advancing issues outnumbered declining stocks by a 4-to-1 ratio on the NYSE and by a 5-to-1 ratio on the Nasdaq. The average number of new 52-week highs skyrocketed on both exchanges, surging to 187 on the NYSE, and 223 on the Nasdaq. The number of new lows collapsed in the meantime, falling to 30 on the NYSE, and 35 on the Nasdaq. The ratio of stocks above their 200-day moving average also continued to rise, getting close to 65% towards the end of the week, but it remains the most negative of our measures.
The most shorted names were among the best-performing stocks lately, as the dovish Fed caused a broad, short squeeze on Wall Street. Lannett (LCI) benefited from the broad rally, climbing by more than 20% in a week, and the short interest of 54% suggests that the drug manufacturer might only be starting its advance. Wayfair (W) also continued higher for the third week in a row, and the stock sports a short-interest of 48%, leaving only a narrow exit for bears. Becton, Dickinson, and Co. (BDX) hit yet another all-time high, and with the days-to-cover (DTC) ratio at 12, all ingredients are in place for a short squeeze. Verisign (VRSN) also continues to burn shorts, marching on to new record highs, with a still extreme DTC ratio of 18.
This week promises some fireworks in the energy segment, as the much awaited OPEC meeting will take place on Wednesday. With the recent turmoil in the Middle East, especially in Saudi Arabia, all eyes will be on the cartel’s crucial, but fragile supply agreements. Besides that, the prelim GDP print will come out on the same day, while the CB Consumer Confidence Index is scheduled for Tuesday, and the ISM manufacturing PMI will be released on Friday. As December is the most bullish month of the year regarding seasonality, and as the usually volatile October and November passed without a major incident, the Gorilla is optimistic that equities will enjoy a healthy Santa Claus rally. Stay tuned for a promising week!