Despite a broad pullback on Monday, the last day of November, the major indices all finished the week in the green, with the Nasdaq and the S&P 500 both hitting new record highs several times. The pace of the advance was far from being breathtaking, as COVID-related hospitalizations and death continued to climb, but the mostly positive vaccine developments supported the market. The energy sector remained very strong amid the negotiations between the OPEC members and Russia. The most COVID-sensitive issues all fared well thanks to the improving long-term economic outlook. The resumed stimulus talks based on a new bipartisan proposal added another bullish catalyst, so from a fundamental standpoint, investors had a great week.
As for the key economic releases, the picture was mixed, the labor market providing plenty of contradicting data. The government jobs report and the ADP payrolls number pointed to a slowing job recovery. However, the unemployment rate’s positive trend remains intact, and wage growth also accelerated in November. The weekly jobless claims report was the most bullish in a month, so the fears of a marked slowdown in the job market might have been overblown. The ISM manufacturing and services PMIs remain very high in an international comparison, while both continue to signal healthy growth as well, and the bullish revision of last week’s Markit services was another positive sign for the sector.
The technical picture continues to be bullish across the board, despite the weakening of the bullish momentum, and from a long-term perspective, the major indices look ready for the next phase of the bull market. The S&P 500, the Dow, and the Nasdaq are all above their 50-day moving averages, and the benchmarks are still way above their 200-day moving averages. Small-caps had another active week as investors closely monitored the stimulus-related developments. The Russell 2000 closed well north of its moving averages and was just shy of its all-time high. The Volatility Index (VIX) remains stuck above the 20 level due to the still considerable economic uncertainty, but it’s declining trend is intact, and a new, calmer era might already have started on Wall Street.
Market internals deteriorated slightly, despite the strength among small-caps, but with key breadth indicators remaining firmly in bull market territory, and nothing suggests that anything more than a period of consolidation or an orderly pullback is ahead. The Advance/Decline ratio hit new bull market highs again while the major indices crept higher, with advancing issues outnumbering decliners by a 6-to-1 ratio on the NYSE and a 5-to-1 ratio on the Nasdaq. The average number of new 52-week highs dropped on both exchanges, falling to 71 on the NYSE and 121 on the Nasdaq. The number of new lows edged higher in the meantime, rising to 2 on the NYSE and 5 on the Nasdaq. The percentage of stocks above their 200-day moving average remained encouragingly high throughout the week, and the measure finished near 86% on Friday.
Short interest continued to drop on Wall Street as the most virus-sensitive issues, and retailers remained strong. The most-shorted issues, in general, outperformed the broader market yet again. American Airlines (AAL) hit its highest level since late-June thanks to the renewed stimulus hopes, and since the stock sports a short interest of 28%, it could be in for a sustained rally. Software provider, Sumo (SUMO), scored a new all-time high this week, thanks to a monster rally on Friday, and since the stock still has a short interest of 38%, the breakout could lead to a short squeeze. Snap Inc. (SNAP) got close to its record high as well, and its very high days-to-cover (DTC) ratio of 11 means that shorts could soon be running for the exits.
The U.S. economic calendar will be relatively light on key releases next week, but we are entering a crucial period of central bank meetings, which could set the tone for the coming months in several asset classes. The NFIB Small Business Index will be out on Tuesday, the JOLTS job openings estimate will highlight Wednesday’s session, the Consumer Price Index (CPI) and the Producer Price Index (PPI) will come out on Thursday and Friday respectively, with the Michigan consumer sentiment number also being scheduled for release on Friday. The European Central Bank (ECB) is expected to revamp its monetary strategy on Wednesday, and even though the latest rumors suggest that the ECB is “out of ammo,” it’s unlikely that it won’t react to the weak economic releases and the surging euro ahead of the Fed’s looming meeting. Stay tuned!
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