Bulls could hardly expect more from the last week of September than what stocks delivered, as the major indices all finished with gains despite a bearish Monday session. The effects of the German elections quickly faded away, and optimism spread on Wall Street in the second half of the week. Small caps have been a major concern for the Gorilla in recent months, but with the help of the tax proposal of the Trump administration, the segment suddenly became the leader of the rally. The Russell 2000 surged to a new all-time high, and except for the Dow, the major benchmarks also closed the 3rd quarter near their record levels, but even the mega-cap index finished the week on a positive note.
Core durable orders came in much better-than-expected in September, and the release boosted the already high-flying industrial complex even more. New home sales and pending home sales were below expectations in the slightly struggling housing segment, and the rising yields of the post-Fed week will likely add to the downward pressure. Janet Yellen further fueled the hawkish speculation with her speech on Tuesday, and the positive surprises provided by the final GDP print and the Chicago PMI also pushed yields up toward the end of the week. The yield on short-term Treasuries are near their lowest levels since the start of the quantitative easing (QE) program, but long-dated bonds don’t exactly share the enthusiasm.
Technicals remained bullish across the board, and the rising short- and long-term trends are still intact with regard to the major benchmarks. The Dow, the Nasdaq, and the S&P 500 are each above their 50- and 200-day moving averages, as the Nasdaq index found strong support near its short-term average. Small caps registered lofty weekly gains, and thanks to those, the Russell 2000 is now far above both of the levels. The Volatility Index (VIX) closed the week a bit below the 10 level again, and the so-called “fear index” was only lower on the record low days in July, as investors removed their hedges after the Fed meeting and the unveiling of the tax plan.
The strong rally in small caps improved market internals significantly, with all of our tracked measures posting much better readings last week. The Advance/Decline line remained on a steeply rising trajectory, hitting new highs almost every day, as advancing issues outnumbered declining stocks by a 5-to-1 ratio on the NYSE and by a 3-to-1 ratio on the Nasdaq. The average number of new 52-week highs rose once again on both exchanges, climbing to 167 on the NYSE, and 214 on the Nasdaq. The number of new lows was a tad lower than in the previous period, dropping to 14 on the NYSE, and 26 on the Nasdaq. The ratio of stocks above their 200-day moving average finally showed meaningful improvement, as Friday’s 68% reading is much closer to what the Gorilla would like to see.
Short interest fell even lower with the help of the rally in the energy sector, and as small caps hit new highs, more and more bears started running for the exits. Caesars Entertainment (CZR) posted three strong sessions to close the week, and the stock might be preparing for a huge move, as short interest still stands at 45%. Atwood Oceanics (ATW) finished with a weekly gain of more than 10%, and the short interest of 60% might signal a short squeeze coming. Garmin (GRMN) finally broke out of its trading range, and with a days-to-cover (DTC) ratio of 15, a strong rally could be in the works. CarMax (KMX) continued its surge with another +5% week, and given its DTC ratio of 14, bears are unlikely to feel safe anytime soon.
Another busy week is coming for traders regarding economic numbers, with the ISM manufacturing PMI kicking off the period. The non-manufacturing index will also come out on Wednesday, when Janet Yellen will give another potentially important speech. The government jobs report will follow Thursday’s trade balance release on Friday, and although the effect of the report will likely be muted after the Fed’s meeting, it’s still the most-awaited event. As investors will continue to ponder the consequences of the tax reform, and the odds of its success, small caps will likely still experience increased activity. The Gorilla hopes that last week’s trends will remain dominant and that the geopolitical tensions won’t return in earnest. Stay tuned!