The stock market basically froze last week, with the major indices trading in an extremely narrow range throughout the period. The near-record low volatility isn’t a bearish sign, especially after the healthy rally during the past few weeks. The overbought readings that the Gorilla observed previously are less obvious after the sideways drift, which could mean that the unusually calm October will surprise bulls with another broad push to new all-time highs. As the political storm in Europe calmed down, and the North Korea crisis also took a backseat, even the slightly hawkish Fed minutes were not enough to cause anything but a minor pullback.
Analysts were focusing on Friday’s retail sales and CPI reports besides the already mentioned minutes of the Fed meeting, but it’s hard to draw a clear conclusion from the numbers. Inflation remained below the Fed’s target of 2%, while also missing the consensus estimate, and the headline retail sales figure also missed expectations. That said, the less volatile core retail sales reading was a positive surprise, and the previous month’s release was revised much higher. The U of M Consumer Sentiment number also blew expectations away, while the PPI Index was in line with estimates. Interestingly, U.S. Treasuries finished higher, despite the decent economic numbers, but the especially strong rally in long-dated bonds is a worrying sign for bulls.
Technicals weren’t hurt by the boring price action, as the major indices finished the week a tad higher, with only small caps losing some ground after their stellar period. The Dow, the S&P 500, and the Nasdaq are still well above their 50- and 200-day moving averages, as the underlying trend is undoubtedly positive across the board. The Russell 2000 lagged the broader market for the second week in a row, but the small-cap benchmark is also miles above both its short- and long-term moving averages. The Volatility Index (VIX) opened the week with a brief surge above the key 10 level, but as European tensions eased, it resumed its relentless drift lower and got very close to the previous near-record levels by the end of the week.
Market internals made the Gorilla smile last week, as the seemingly stretched prices didn’t lead to a meaningful deterioration in the most reliable measures, which usually would precede a correction. The Advance/Decline line continues to hit new highs almost daily, and advancing issues outnumbered declining stocks once again, 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 retreated slightly on both exchanges, declining to 211 on the NYSE, and 235 on the Nasdaq. The number of new lows edged higher in the meantime, to 23 on the NYSE, and 33 on the Nasdaq. The ratio of stocks above their 200-day moving average was virtually unchanged in the calm environment, and although the 69% level is still worrisome, the trend is favorable for bulls.
Short interest remained near record lows on the major exchanges with a slight increase in the financial sector, thanks to the bearish trend in the major banks. Shorts of furniture store RH (RH) might be frightened, as the stock is on the rise again, hitting a new 20-month high, despite the short interest of 58%. Lannett (LCI) keeps on delivering blows to bears too, adding another 12% last week, with short interest still standing at 57%. Simon Property (SPG) popped up on the list of stocks with the highest days-to-cover (DTC) ratio, with a reading of 12, and the stock just posted a 6-month high, probably signaling the start of a short squeeze. Garmin (GRMN) has been quietly rising since the end of July, but its sky-high DTC ratio of 17 means that things might get even more difficult for bears soon.
Traders are in for a relatively quiet week regarding economic releases, with no crucial numbers scheduled until Wednesday, when building permits and housing starts will be released. Existing home sales will complete the housing ‘hat trick” on Friday, while the Philly Fed Index will highlight Thursday’s session. The speculation regarding the next Fed Chair will likely heat up even more during the week, but so far, investors have ignored rumors, and it’s unlikely that this would put the bullish trend in any danger. The ongoing earnings season has more potential to do so, but barring any huge negative surprises from Johnson & Johnson (JNJ), Procter & Gamble (PG), GE (GE), and IBM (IBM), the Gorilla thinks that bulls have all the reasons to remain positive. Stay tuned!