Stocks delivered a delightful week for bulls once again, as the previous week’s strong showing was followed by a relentless march to record highs. Although small caps took a breather toward the end of the week after their tax-plan induced surge, financials and industrial stocks continued to lead the bull run. Political woes in the UK and Spain made headlines in the otherwise quiet environment, but the main overseas benchmarks also hit new bull market and all-time highs. All in all, Wall Street is quiet and optimistic, with only the signs of complacency worrying the Gorilla. Volatility and short interest are back to record lows, despite October’s famously negative seasonality, which bodes well for bulls before the usually bullish year-ending period.
With the exception of the headline number of the government jobs report, economic numbers were on the positive side last week. While payrolls declined for the first time since 2011, it’s easy to see that the devastating hurricanes of September had a huge effect on hiring and that the rest of the report was encouraging. Besides the jump in hourly earnings and the participation rate, both the ISM manufacturing and non-manufacturing PMI numbers blew expectations away, and factory orders also came in above the consensus estimate. Thanks to the positive numbers, bond investors pushed the odds of a December rate hike above 80%, without hurting the rally in equities.
It’s no surprise that amid the broad rally to all-time highs, technicals are nothing short of spectacular, with no bearish signs on the horizon concerning the major indices. The Dow, the S&P 500, and the Nasdaq are well above their 50- and 200-day moving averages thanks to the lofty gains, probably warning bulls of an overbought market. Small caps lagged the broader indices in the second half of the week, but the Russell 2000 is still very far above both its short- and long-term indicators. The Volatility Index (VIX) drifted even closer to its record low before Friday’s brief spike, as the index closed below the widely-watched 10 level yet again following the post-payrolls jump.
As small caps gave up their leading role, the improvement in market internals lost some momentum too. That said, one has to look very closely to see any cause for concern among the most reliable measures. The Advance/Decline line continued its seemingly unstoppable rise, as advancing issues outnumbered declining stocks again 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 surged higher on both exchanges, jumping to 242 on the NYSE, and 294 on the Nasdaq. The number of new lows remained very low, falling to 13 on the NYSE, and 21 on the Nasdaq. The ratio of stocks above their 200-day moving average edged higher after the healthy jump of the previous week, to finish just below the 70% mark despite the consolidation in small caps.
As Trump’s tax proposal caused panic buying in small caps, short interest took a nosedive across the board and followed volatility on its way toward its record lows. Match Group (MTCH) had another blowout week, reaching all-time highs almost every day, and the 43% short interest hints on more fuel in the tank. Generic drug manufacturer Lannett (LCI) also posted a +10% week, and bears could be feeling the heat given its short interest of 57%. Verisign (VRSN) is still leading the list of stocks with the highest days-to-cover (DTC) ratio, with a reading of 20, and with the stock marching higher, the pressure on shorts is mounting. Diamond Offshore (DO) is making a move as well, up by 30% since September, and new highs are likely ahead for the stock given its DTC ratio of 12.
The second half of the week will be packed with crucial economic releases, with the minutes of the previous Fed meeting being first in line on Wednesday. The PPI report and ECB President Draghi’s speech will highlight Thursday’s session, while the retail sales and CPI reports will come out on Friday. As the saber-rattling regarding North Korea is still ongoing, one cannot rule out another “risk-off” event this week, but hopefully, the crisis will remain contained. The Gorilla thinks that apart from an outside shock, the market’s robust rally could be lasting, even if short-term corrections are always part of the “game.” Stay tuned for another eventful week!