The global financial elite gathered again in the picturesque city of Davos last week, and the hottest topics de jour were all on the agenda of the forum, such as interest rates and quantitative easing, protectionism, Brexit, and Bitcoin. Thanks to the busy event, volatility returned to the life of traders, even as the government shutdown came and went without major implications. Currencies saw the biggest movements, with the dollar being at the epicenter of the action, but equities also experienced wild intraday swings, at least compared to recent calmness. The major indices still finished the week in the green, despite some notable divergences, as the dollar fell to an 18-month low against the euro, and crude oil topped $66 per barrel for the first time since the end of 2014.
Economic numbers are in stark contrast with the performance of stocks so far this year, as the economic surprise index in 2018 took a nosedive amid the powerful rally. The housing market was the center of attention last week, with the existing and new home sales figures both coming out and missing expectations by significant margins. As the previously released numbers were also revised lower, the Gorilla thinks that rising rates are finally taking their toll on this segment. Friday’s GDP print was also a sizable miss with a 2.6% annualized reading, while the durable goods orders provided some much-needed hope for bulls.
The technical picture is still overwhelmingly bullish, as the “overbought” readings that the Gorilla noted last week only led to another choppy week, without as much as a couple of negative sessions. The Dow, the S&P 500, and the Nasdaq are still well clear of both their 50- and 200-day moving averages, and the rally seems a tad less stretched after a two-week consolidation period. While small caps continued to grind higher together with the broader market, the performance of the Russell 2000 is less convincing this year, and that relative weakness should be monitored by bulls in the coming weeks. The Volatility Index (VIX) remained elevated for the third week in a row, although it stayed below its recent high, and it’s currently standing at 11.
Market internals improved slightly following a period of negative divergences, without a meaningful correction in prices, which once again proved the underlying strength of the bull market. The Advance/Decline line pushed to a new high after drifting sideways for two weeks, as advancing issues outnumbered declining stocks, by a 5-to-1 ratio on the NYSE and by a 4-to-1 ratio on the Nasdaq. The average number of new 52-week highs climbed higher on both exchanges, rising to 277 on the NYSE, and jumping to 325 on the Nasdaq. The number of new lows fell significantly in the meantime, dropping to 42 on the NYSE, and 30 on the Nasdaq. The ratio of stocks above their 200-day moving average bounced back encouragingly, although the current reading of 69% still concerns the Gorilla.
Short interest remained stable after the early-year rally, and the most shorted stocks performed in line with the broader indices, as investor sentiment is still positive. MiMedx Group (MDXG) had a great week, adding more than 10% and hitting a 4-month high, and given its short interest of 40%, the stock might be headed for an all-time high soon. Match Group (MTCH) spiked to a new record high after a calm month, and scared bears could fuel the rally further, as short interest still stands at 46%. TransDigm (TDG) also keeps on delivering for bulls, while severely squeezing shorts, as the stock is edging higher on the list of the issues with the highest days-to-cover (DTC) ratios, currently sporting a reading of 14.
Traders could be in for another busy period, with key earnings reports, a Fed meeting, and the government jobs report promising action throughout the week. The new Fed chair, Jerome Powell has been confirmed by the Senate before the scheduled gathering on Wednesday, and although investors don’t expect a policy change this time around, the committee’s comments could cause a spike in volatility again. The earnings season will start to heat up this week, with six of the most valuable companies, Apple (AAPL), Alphabet (GOOG), Microsoft (MSFT), Amazon (AMZN), Exxon (XOM), and Facebook (FB) all publishing their quarterly numbers among many others. With this in mind, keep your seatbelts fastened and stay tuned for an exciting week!
