State of the Stock Market Analysis for the Week Ending on  January 24th Chaotic Week for the Stock Market | State of the Stock Market 1-24-20All You Need Is Jobs

Investors had a lot of new information to digest this week, with the mixed COVID headlines, the bullish U.S. economic developments, President Biden’s initial moves and longer-term plans, and earnings all making waves. The rally in Big Tech was the most surprising story of the week, carrying the large-cap benchmarks to new record highs, but below the surface, a lot of stocks struggled to keep up with the tech sector. The peaceful transition of power, the bullish earnings, and the improving U.S. COVID numbers weren’t enough to keep the recovery in cyclicals going, as doubts surrounding the new administration’s stimulus plan and the bleak European trends kept a lid on the rally.

The slight deterioration in the key economic releases continued this week, despite a few promising indicators, but the long-term outlook is still improving, and the stimulus deal could soon solve some of the current issues. Consumer-related measures took the biggest short-term hit, with personal spending, personal income, the Core PCE Price Index, and the CB consumer confidence number all considerably missing expectations. The better-than-expected Richmond Manufacturing Index and weekly jobless claims report made bulls smile, and the final reading of the third-quarter GDP print also surprised on the upside. The housing market sent mixed signals, as existing home sales remained strong, the Housing Price Index was above the consensus estimate, but new home sales missed by a wide margin in November.

Following weeks of weaker-than-expected economic numbers, we finally got a batch of promising releases, although the pressure on the job market continues to be apparent. The weekly number of new jobless claims was 900,000 again, but that was still below the consensus estimate, and last week’s reading was revised lower as well. The Philly Fed Index, building permits, housing starts, the Markit manufacturing and services PMIs, and existing home sales all smashed expectations, and even the struggling European economies showed resilience in the face of the new wave of containment measures.

The technical picture continues to be clearly bullish across the board, and despite the possibility of a short-term pullback, the bull market’s foundation remains rock solid. The S&P 500, the Dow, and the Nasdaq are all above their rising 50-day moving averages, and the benchmarks are also well clear of their bullish 200-day moving averages. Small-caps showed relative weakness this week after leading the way higher in recent months, but the Russell 2000 still finished the week in the green for the tenth time in a row, miles above both its moving averages. The Volatility Index (VIX) turned lower in the wake of President Biden’s peaceful inauguration, and while the “fear gauge” pushed higher on Friday, it still looks ready to finally drop below the widely-watched 20 level.

Market internals deteriorated slightly due to the weakness among small-caps, but the key breadth measures are still at or near their bull market highs thanks to the broad-based rally of the past months. The Advance-Decline line seems to be topping out despite the new all-time highs in the major indices, even though advancing issues outnumbered decliners by a 5-to-4 ratio on the NYSE and a 3-to-1 ratio on the Nasdaq. The average number of new 52-week highs diverged on the two exchanges, falling to 110 on the NYSE but rising to 221 on the Nasdaq. The number of new lows remained very low in the meantime, edging higher to one on the NYSE and two on the Nasdaq. The percentage of stocks above their 200-day moving average pulled back from its decade-long high, but it still closed the week at the encouragingly high 88% level.

Short interest continued to drop on Wall Street, even though the most-shorted issues had a slightly negative week, as investors continue to reduce their long-term bearish bets. SunPower (SPWR) continued its furious short squeeze, and the stock is now up by more than 100% in just five weeks, with its short interest still standing at 53%. iRobot (IRBT) also had another great week, hitting its highest level since mid-2019. Since the stock still sports a short interest of 37%, the rally could continue in the coming months. Abiomed (ABMD) popped up on the list of stocks with the highest days-to-cover (DTC) ratios, with a reading of 9. Although the stock just hit an almost two-year high, it might be headed for a test of its all-time high from 2018.

We are in for a busy week of economic releases, with more central bank action also on the schedule. The Federal Reserve will release its monetary statement on Wednesday, and while Jerome Powell & Co. are not expected to change their policies in a significant way, the Fed could hint at a closer collaboration with the new administration. As for the economy, the CB consumer confidence number will be out on Tuesday, the durable goods report is scheduled for Wednesday, the first reading of the fourth-quarter GDP print will highlight Thursday’s session, while the week will end with the Core PCE Price Index, personal spending, and the Chicago PMI. Stay tuned!
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