The last full trading week of the year saw gains across the main sectors on Wall Street, although the momentum of the “vaccine rally” became a bit weaker due to technical factors. Following last week’s pullback and the early-week spike in volatility, the choppy but bullish post-Fed trends were comforting for bulls, as the risk of a sizable overbought correction declined. Global risk assets provided support for U.S. stocks despite the lingering fears of a no-deal Brexit. European assets surged to new recovery highs, finally erasing their “winter-wave” losses. While the stimulus saga is still not over, the two sides will likely strike a deal before the end of the year, and small-caps could remain in the driver’s seat thanks to the fiscal boost.
This week’s economic releases provided plenty of major surprises, with most of them being negative. The retail sales report and the weekly number of jobless claims were the most painful for investors, as both pointed to a weak patch in the consumer economy, which comprises a much larger share of U.S. GDP than the currently stronger manufacturing sector. On a positive note, the Markit manufacturing and services PMIs painted a more promising picture of the domestic outlook. That said, the Philly Fed Index missed by a wide margin, while the housing market sent mixed signals, with the NAHB coming in well below the consensus estimate but building permits and housing starts holding their ground.
Despite the mixed price action of the past couple of weeks, the technical picture remains clearly bullish on Wall Street, with both the short- and long-term trends being positive across the board. The S&P 500, the Dow, and the Nasdaq are all trading above their 50-day moving averages, and the benchmarks are also well above their 200-day moving averages. Small-caps had another promising week, with the Russell 2000 outperforming its large-cap peers, and the index continues to be miles north of both its moving averages. Even though the Volatility Index (VIX) hit a one-month high ahead of Wednesday’s Fed meeting, the “fear gauge” finished the week lower, and could get close to the widely-watched 20 level next week.
Market internals continue to support the bullish case thanks to the rally among small-caps, with the key breadth indicators spending the weekend near their bull market highs again. The Advance-Decline line continued to push to new highs this week, as advancing issues outnumbered decliners by a 5-to-1 ratio on the NYSE and a 6-to-1 ratio on the Nasdaq. The average number of new 52-week highs inched higher on both exchanges, rising to 123 on the NYSE and 165 on the Nasdaq. The number of new lows also rose slightly in the meantime, increasing to 4 on the NYSE and 8 on the Nasdaq. The percentage of stocks above their 200-day moving average continues to be very high, and the measure even improved a bit thanks to small-caps, finishing the week near 87%.
The declining trend in short interest remains intact on Wall Street, and while the picture was less clear than in recent weeks, the most-shorted issues still outperformed the major indices, on average. SunPower (SPWR) got even closer to its all-time high after breaking out of its consolidation pattern, and its short interest of 52% could mean that the rally will continue in 2021. The short squeeze in Stitch Fix’s (SFIX) gathered steam this week, as bears rushed to the exits in droves, but with its short interest still at 35%, the stock is poised to push even higher. Current GorillaPick, Cerner Corp. (CERN), popped up on the list with the highest days-to-cover (DTC) ratios, with a value of 9, so the stock could be ready to break out of its five-year-long consolidation pattern on the heels of its recent rally.
The shortened Christmas-week – the stock market will close for the week at 1:00 PM ET on Thursday, the 24th – will be light on key economic releases, but we could still see meaningful moves in stocks and other asset classes in the wake of a possible last-minute stimulus deal. The final reading of the third-quarter GDP print will be out on Tuesday, together with the CB consumer confidence number and existing home sales, while new home sales, the Core PCE Price Index, and personal spending will highlight Wednesday’s session. While the major indices remain overbought due to the massive November rally in stocks, the positive catalysts of the past couple of weeks could still lead to a healthy Santa Claus rally. Stay tuned
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