November kicked off with a push to new all-time highs in the stock market, with all three of the major indices hitting record highs multiple times during the week. Almost all of the key risk-on sectors participated in the rally, with the major overseas indices also hitting multi-month highs, as the risk of a global recession declined, and the U.S. and China got closer to finalizing the “phase one” trade deal. Thanks also to the improvements in global economic trends, Treasury yields surged to their highest levels in months, despite last week’s rate cut and the Fed’s dovish message. The mostly positive earnings surprises boosted investor sentiment as well, with especially Berkshire Hathaway (BRK.A/BRK.B), Disney (DIS), CVS (CVS), and Qualcomm (QCOM) posting bullish numbers.
While the week was fairly low on key economic releases, the most important indicators leaned bullish both internationally and domestically. The ISM non-manufacturing PMI provided the most important positive surprise, coming in at 54.7, well above the consensus estimate of 53.5 and its previous reading of 52.6. While it’s too early to say that the deterioration in the services sector, which started over a year ago, is over, the fears of an outright recession seem to have been greatly exaggerated. The JOLTS job openings estimate and the weekly number of new jobless claims confirmed that the labor market remains robust, and should the improvement in Europe continue, the recent soft patch in economic numbers could soon be over in the U.S. as well.
The technical picture is still clearly bullish on Wall Street, with the major indices all trending higher both on the short and long-term time-frames, with more sectors and stocks joining the party this week. The S&P 500, the Nasdaq, and the Dow are still well above their rising 200-day moving averages, and the benchmarks also closed the week far above their rising 50-day moving averages. While small-caps showed strength for the better part of October, the Russell 2000 lost some of its momentum as the week progressed, but the index still hit a new six-month high and closed above both its moving averages. The Volatility Index (VIX) drifted higher in the first half of the week, but it remained near its three-month low, finishing near the 12 level on Friday.
Market internals deteriorated somewhat due to the weakness in small-caps, but the most reliable breadth measures are still firmly bullish, even though a short-term pullback could be ahead for stocks. The Advance/Decline line’s push to new bull market highs halted this week, although advancing issues outnumbered decliners by a 3-to-2 ratio on the NYSE, and by a 4-to-3 ratio on the Nasdaq. The average number of new 52-week highs increased slightly on both exchanges, rising to 116 on the NYSE and 108 on the Nasdaq. The number of new lows edged lower in the meantime, falling to 24 on the NYSE and 55 on the Nasdaq. The percentage of stocks above their 200-day moving average failed to confirm the rally to new all-time highs, but the measure remained stable throughout the week, closing near 61% on Friday.
Short interest was virtually unchanged this week, as the broad rally lost some of its momentum, but the total amount of bearish bets remains at historically low levels. Teladoc Health (TDOC) recently broke out from a one-year-long consolidation pattern, and since the stock sports a short interest of 38%, it could be ready to hit new all-time highs in the coming months. RH (RH) pulled back after hitting a record high in October, but since it still has a short interest of 37%, the stock could soon resume its run. Henry Shein (HSIC) also surged higher in the wake of its quarterly report, after drifting lower for several months, and since it still has a very high days-to-cover (DTC) ratio of 17, a short squeeze could be ahead.
Investors are in for a much busier week of economic releases with inflation and the consumer economy being in focus, and the action will likely get heated in the second-half of the week. The Consumer Price Index (CPI) and the Producer Price Index (PPI) will come out on Wednesday and Thursday respectively, while on Friday, we will have the retail sales report, the Empire State Manufacturing Index, and industrial production coming out. The Chinese retail sales report and industrial production could also make waves on Thursday, and investors will be eager to know the exact date and place where the “phase-one” trade deal will be signed, as there are still doubts surrounding the agreement on Wall Street. Stay tuned!
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