It has been an Election Week to remember on Wall Street, without a doubt, as stocks experienced the strongest post-election rally on record despite the uncertainty and the controversy surrounding the race for the presidency. While we still do not have official results, the most likely and quite surprising outcome triggered a memorable rally in the tech sector, which propelled the major indices to within striking distance of their record highs. Although the fate of the highly-anticipated stimulus bill remains unknown, even cyclical issues joined the rally on Thursday as volatility took a nosedive and global risk assets turned sharply higher. On a negative note, the COVID-19 virus continues to quickly spread in the U.S. and Europe, with the number of new cases hitting another all-time high globally, and that remains a major risk factor for stocks.
Even though the week’s economic releases were mixed, there is still no indication of a major slowdown in the recovery. The nearly two-year high of 59.3 in the ISM manufacturing PMI boosted investor confidence on Monday, and despite the weaker services PMI, the most important forward-looking measures continue to sport solid readings. The ADP payrolls number, the Challenger job cuts estimate, and the weekly jobless claims report all suggested that the job market cooled down somewhat amid the autumn wave of outbreak. However, the government jobs report showed that the conditions continued to improve in October. Wards total vehicle sales missed expectations for the first time since June, and the coming weeks will be crucial in deciding how consumers react to the gloomy COVID trends.
The short-term technical picture quickly turned positive thanks to the four-day winning streak in the major indices, and as the long-term trend remained bullish during the correction, technicals are as positive as they get on the Street. The S&P 500, the Dow, and the Nasdaq are all back above their 50-day moving averages, and the benchmarks are also well clear of their 200-day moving averages. While small-caps had a mixed week and joined the rally with a one-day delay, the Russell 2000 still hit a new recovery high ahead of its large-cap peers, while also closing the week above both its moving averages. The Volatility Index (VIX) pulled back sharply following Election Day, dropping below both its 50- and 200-day moving averages in the process, and it re-entered its pre-correction range, closing the week near the 25.
Market internals improved significantly thanks to the rally, and the technical strength of the Russell 2000, and the key breadth measures are back near their recovery highs. While the Advance-Decline failed to hit a new bull market high, it turned sharply higher this week, as advancing issues outnumbered decliners by an 11-to-1 ratio on the NYSE and a 13-to-1 ratio on the Nasdaq. The average number of new 52-week highs bounced back hard on both exchanges, jumping to 64 on the NYSE and 81 on the Nasdaq. The number of new lows crashed in the meantime, plunging to 4 on the NYSE and 18 on the Nasdaq. The percentage of stocks above their 200-day moving average roared back together with the major indices hit and closed the week at 66%, just below its recovery high.
Short interest dropped sharply in the second half of the week, as investors exited their election hedges in droves, and the most-shorted issues also enjoyed tailwinds thanks to the improving sentiment. Even though Carvana (CVNA) is still stuck in a corrective pattern, ever since late-August, it remains in a rising long-term trend, and as the stock has a short interest of 30%, a technical breakout could hurt bears immensely. Leveraged solar play, SunPower (SPWR), hit an almost five-year high this week, resuming its eye-popping rally, and since the stock now sports a short interest of 51%, a short squeeze might be ahead. ViacomCBS (VIAC) continues to show promising signs after breaking out of a multi-week consolidation pattern, and despite Friday’s pullback, the stock could be ready to continue its post-crash recovery with the help of its days-to-cover (DTC) ratio of 11.
From a political perspective, it is hard to predict what kind of week is ahead of us, as the very close results will likely remain in focus, but the economic calendar will definitely be lighter on key releases than it was this week. Thursday’s Consumer Price Index (CPI) and Friday’s Producer Price Index (PPI) could have the most significant impact on stocks, but Tuesday’s JOLTS job openings estimate and NFIB Small Business Index will also be closely watched. The evolution of the pandemic and the possible resumption of the stimulus talks will be on investors’ radars as well, as more and more experts call for new containment measures in the U.S. due to the surging number of infections and hospitalizations. Stay tuned!
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