Stocks turned choppy following last week’s broad-based rally to new all-time highs, as investors digested the mixed economic indicators, the overwhelmingly positive COVID developments, and bullish earnings reports. While stocks continue to be overbought in the wake of the historic recovery rally, the influx of positive catalysts has been enough to support the market, with the Biden administration and the Fed providing ample fiscal and monetary stimulus. The record-breaking earnings season proved that the economic recovery remains on track, and with pressure on the European economies easing too, the “reflation” trend in risk assets is likely to remain intact.
We had a relatively quiet week of economic releases, with all eyes on the labor market and inflation. The most-anticipated indicators were mixed following weeks packed with positive surprises. New jobless claims missed expectations for the first time in three weeks due to rising pandemic-related claims, but the bullish JOLTS job openings estimate means that the soft patch in the jobs market could soon be over. The lower-than-expected core Consumer Price Index (CPI) and NFIB Small Business Index also hinted at an early-year COVID hit to the consumer economy, but since the Biden administration is set to introduce even more fiscal measures, the rebound could be swift in the sector.
The technical picture remains bullish in all time-frames despite this week’s consolidation, although overbought momentum readings make a profit-taking event possible. The S&P 500, the Dow, and the Nasdaq are all above their 50-day moving averages, and the benchmarks are still miles above their 200-day moving averages. Small-caps experienced an explosive rally, and the Russell 2000 finished the week way above both of its moving averages after hitting its highest level since February. The Volatility Index (VIX) dropped below 20 two times this week, and finished right at the line-in-the-sand level on Friday, which might signal a paradigm shift on Wall Street.
Market internals continue to be wildly bullish in the wake of last week’s surge in small-caps, and the key breadth measures are all at or near their bull market highs. The Advance-Decline line remains in a strong rising trend despite this week’s mixed price action, as advancing issues outnumbered decliners by a 3-to-1 ratio on the NYSE and a 4-to-1 ratio on the Nasdaq. The average number of new 52-week highs surged higher on both exchanges, rising to 191 on the NYSE and 323 on the Nasdaq. The number of new lows remained close to nil, ticking lower to zero on the NYSE and one on the Nasdaq. The percentage of stocks above their 200-day moving average hit another decade-high near 92%, before closing the week slightly lower at 91%.
Short interest remains at a historically low level on Wall Street, despite this month’s slight bounce in the total amount of bearish bets, with the impact of the Reddit-fueled short squeeze still being apparent. SunPower (SPWR), bounced back following last week’s dip, but it remains slightly below its all-time, with its short interest now at 32%. International Flavors & Fragrances (IFF) was largely unaffected by the short squeeze, and its bullish earnings report coupled with its short interest of 41% could lead to a strong rally in the stock. Analog Devices (ADI) showed up on the list of stocks with the highest days-to-cover (DTC) ratios, with a reading of 12, and since the stock has been outperforming the broader market, it could be ready to hit new all-time highs again.
While the first half of the holiday shortened-week will be fairly light on economic releases, things will get heated later in the week with crucial indicators coming out from all sectors of the economy. Retail sales and the Producer Price Index (PPI) will be released on Wednesday, together with the FOMC meeting minutes. The Philly Fed Index, building permits, and housing starts are scheduled for Thursday, with the Markit manufacturing and services PMIs and existing home sales coming out on Friday. U.S. politics will also remain in the spotlight due to former President Trump’s impeachment trial and President Biden’s stimulus proposal. We also hope that the global COVID picture will continue to improve. Stay tuned!
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