The Week Ahead Stock Market Update | December 12th, 2016

The recent correction on Wall Street resolved in a very satisfying way for bulls last week. The major indices all finished the period with significant gains, as small caps continued to lead the way, providing a solid base for the rally. The main benchmarks completed a rare “clean sweep,” advancing in all five sessions of the week. The ECB’s announcement, regarding the tapering of the bank’s quantitative easing program, was the big news of the period, but stocks barely budged following the surprisingly “hawkish” words of Mario Draghi. The Gorilla noticed that the domestic market is ignoring every bit of bad international news again – a very encouraging sign for the coming weeks.

Economic numbers were supportive of a rate hike once again, with both the Consumer Sentiment index and the Non-Manufacturing PMI beating expectations by healthy margins. Treasury yields continued to rally together with stocks, and bonds finished the week near their 2016 lows following a weak bounce. Investors think that the monetary tightening move is all but certain at Wednesday’s FOMC meeting, especially after the ECB’s policy shift. The Bank of England will also decide on its benchmark rate this week, and traders are paying closer attention to the BOE than usual, as the “Brexit” is still among the biggest risk factors globally. Apart from the central bank events, the retail sales report will also come out on Wednesday, while the CPI and the Philly Fed index is scheduled for release on Thursday.

Technicals continue to flash green across the board, despite the fact that some previously strong sectors are still lagging the broader market. All three of the major indices are trading above the 50- and 200-day moving averages, with the Dow and the S&P 500 still performing better than the Nasdaq. The Russell 2000 gained almost 5% last week, and the benchmark finished well above both moving averages, as the strength of small caps continues to impress the Gorilla. The Volatility Index (VIX) showed a slightly concerning divergence amid the broad rally, but the closing reading of 12 remains positive, signaling a historically low level of fear among investors.

Market internals improved significantly thanks to the bullish price action, with the previously worryisome negative signs fading away towards the end of the week. The Advance/Decline jumped to a new all-time high once again, as advancing stocks outnumbered declining issues, by a 6-to-1 ratio on the NYSE and by a 5-to-1 ratio on the Nasdaq last week. The average number of new 52-week highs exploded higher on both exchanges, rising to of 346 on the NYSE and to 384 on the Nasdaq. The number of new lows collapsed amid the rally, falling to 22 on the NYSE and 28 on the Nasdaq. The ratio of stocks above their 200-day moving average finally caught up with the other indicators, surging above 67%; a new 6-week high on Friday.

The energy sector continues to dominate the list of the most shorted stocks on the NYSE and the Nasdaq, while the post-election shift is still causing significant changes. Oil and gas service provider RCP (RES) is showing signs of a classic “short squeeze,” as the stock keeps on hitting new 24-month highs, while the short interest in the company is still above 50%. Short sellers of LendingTree (TREE) might be feeling the heat as well, as the short interest increased to 53%, even though the stock rose by more than 40% since the election. The list of the stocks with the highest day-to-cover ratios (DTC) also saw mostly bullish changes. Auto dealership CarMax (KMX) and payment provider Western Union (WU) both jumped higher on the list, with DTC ratios of 13 and 15 respectively, as both stocks rallied by more than 10% last week.

The Gorilla thinks that this week might bring the last volatile period of the year, as the usually calm Christmas period is quickly approaching. It’s been a crazy ride for investors since the surprising conclusion of the presidential election, and the past few weeks seemed to have passed in a blink of an eye. That said, the Gorilla hopes that the current “Santa Claus Rally” will continue, although last week’s furious momentum will probably be hard to keep up. Wall Street seems to be happy with how the previously feared president elect’s administration is shaping up, as the Trump-bounce is still very much intact. Stay tuned for an exciting “Fed-week!”