The big Fed-Day has come and gone without a major effect on the ongoing trends in the stock market. While the Central Bank announced its plan to reduce its balance sheet starting in October, the benchmark rate remained unchanged. The major indices registered a mixed week as financials, and thus the S&P 500, slightly outperformed while the Nasdaq lagged the broader market. On a positive note, small caps are back on the bull market track following an up and down week, as the Russell 2000 posted an all-time high on Friday. Apart from the Fed, the North Korean crisis made headlines once again, and although the broader international sanctions could help in taming Kim Jong Un, the country’s nuclear threat continues to grow.
Janet Yellen and Co. surprised the market with the swift unwinding plan, while the FOMC’s hawkish view regarding a December rate hike was also unexpected. Eleven out of the 15 members expect a tightening step at the next meeting, which caused a jump in yields on short-short Treasuries. Interest rate expectations were also pushed higher by better-than-expected domestic and international economic numbers. Existing home sales were disappointing last month, but besides that, all of the major releases were bullish. Building permits and housing starts pointed to a rebound in the housing market, while the jump in the Philly Fed Index suggests strong momentum in manufacturing.
The stable conditions left the positive technical picture unscathed and the strong performance in small caps made the Gorilla smile too. The Dow, the S&P 500, and the Nasdaq remain well above their 50- and 200-day moving averages, with only the tech benchmark edging a tad closer to its short-term indicator in the second half of the week. As the Russell 2000 surged to an all-time high, it’s not a surprise that sizeable gaps opened up between the small cap index and both the short- and long-term averages. The Volatility Index (VIX) remained under pressure, despite a slight increase in hedging activity ahead of the Fed. The VIX is now back near the 10 level thanks to the late-week lull.
Market internals continued to improve despite the mixed performance of major indices, as small caps greatly boosted the most reliable measures. The rise of the Advance/Decline line accelerated. The indicator kept hitting new highs all week long, as advancing issues outnumbered declining stocks by a 4-to-1 ratio on the NYSE and by a 3-to-1 ratio on the Nasdaq. The average number of new 52-week highs continued to rise steadily, climbing to 159 on the NYSE, and 175 on the Nasdaq. The number of new lows edged higher in the meantime, rising to 16 on the NYSE, and 27 on the Nasdaq. The ratio of stocks above their 200-day moving average remains the most worrying measure, and although the number improved somewhat, Friday’s 64% reading is still far from being stellar.
Short interest got another hit after the Fed meeting, and the most shorted stocks outperformed the broader indices towards the end of the week as a sign of the improving sentiment. California Resources (CRC) is showing the characteristics of a short squeeze, as the stock jumped 20% in a week, despite the short interest of 45%. Shake Shack (SHAK) continued to deliver for bulls, adding another 5% to its prior gains, while short interest is still at 58%. Iron Mountain (IRM) sports a days-to-cover ratio (DTC) of 18, and the stock is just below its all-time high after drifting higher throughout the week. CarMax (KMX) caused panic among shorts on Friday, jumping by almost 10%, and with a DTC ratio of 14 spells more trouble for bears.
Economic numbers will take center stage this week, with crucial indicators coming out almost every day. The CB Consumer Confidence Index will be the first in line on Tuesday, with the durable goods report being released on Wednesday, and the final GDP reading coming out on Thursday. The Chicago PMI and personal spending will highlight the last session of the week, and the Gorilla hopes that the string of releases will be in line with last week’s positive trend. That said, stocks showed resilience even in the face of negative news of late, and bulls can rightfully hope for another week of all-time highs on Wall Street, especially after the encouraging small-cap rally. Stay tuned for another busy week!