May 18, 2024

Investors celebrated multiple historic milestones this week, with the Dow's crossing the 40K level taking the cake. The major indices each hit new record highs while extending their winning streak to four weeks. Treasury yields continued their slide amid the week's disappointing economic data, with inflation fears easing somewhat, which contributed to the continued rally in stocks. The bullish first-quarter earnings season gave more reasons for investors to flock into stocks, and even though the major indices closed a bit below their fresh record highs and small-caps showed technical weakness throughout the week the foundation of the ongoing bull market still looks rock solid.

While most key economic releases provided negative surprises this week, with the week’s highly-anticipated inflation reports sending a mixed message, the slightly cooler-than-expected Consumer Price Index (CPI) made the most headlines, giving a boost to stocks and global risk assets. Retail sales, the Empire State Manufacturing Index, the Philly Fed Index, industrial production, the NAHB Housing Market Index, the CB Leading Index, building permits, and housing starts all missed expectations, suggesting that this year's economic slowdown is set to continue in the coming months. On the bright side, the number of new jobless claims dropped following last week’s surprise jump, core retail sales increased in line with expectations, while business inventories edged lower, signaling a slight uptick in demand.

The technical picture continues to be positive at the level of the major indices and in most “risk-on” sectors, and this week’s new all-time highs confirmed that the bull market is still well on track. The Dow, the Nasdaq, and the S&P 500 are all above their 50-day moving averages, and the benchmarks continue to be well clear of their 200-day moving averages. Small-caps enjoyed tailwinds for most of the week, but despite closing well above its moving averages, the Russell 2000 failed to hit a new bull market high. The Volatility Index (VIX) hit a new year-to-date low this week, confirming the major indices’ technical breakout, and the "fear gauge" could soon “test” its post-COVID low from December.

Market internals improved even further thanks to this week’s broad-based rally, with the key breadth measures all hitting new bull market highs or getting very close to their prior highs. The Advance-Decline line surged to a new bull market high once again, as advancing issues outnumbered decliners by a 7-to-1 ratio on the NYSE and a 9-to-1 ratio on the Nasdaq. The average number of new 52-week highs increased on both exchanges, rising to 143 on the NYSE and 93 on the Nasdaq. The number of new lows declined in the meantime, plunging to 12 on the NYSE and 49 on the Nasdaq. The percentage of stocks above their 200-day moving average hit a new bull market high as well, topping the 70% level once again, and the measure closed just below 71% on Friday.

Short interest continued to plummet across the board, with the total amount of bearish bets hitting a multi-year low this week amid the increasing rate cut odds. Celsius (CELH) got close to hitting a new all-time high this week, registering double-digit gains, and as the stock now “only” has a short interest of 11%, it could still stage a short squeeze in the coming weeks. Tractor Supply (TSCO) closed the week near its record high as well, and since the stock’s days-to-cover (DTC) ratio now stands at 10, it could soon resume its bull run in earnest. Iron Mountain (IRM) already scored a record high this week after erasing its post-earnings dip, and the stock’s DTC ratio of 7 could fuel further gains in the coming weeks.

The domestic economic calendar will be empty in the first half of next week, but we will get a slew of crucial reports toward the end of the week, starting with Wednesday afternoon’s FOMC meeting minutes, which could set the tone of trading for the rest of May. Existing home sales will be out on Wednesday as well. New home sales and the manufacturing and services PMIs will highlight Thursday’s session, while the week will end with the durable goods report and the revised Michigan consumer sentiment number. As for technicals, the major indices’ fresh record highs will likely remain in focus, and investors hope that small-caps will join the push to new highs as well. Stay tuned! 

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