State of the Stock Market Analysis for the Week Ending on November 22nd 2020 Second Bullish Monday in a Row | State of the Stock Market 11-22-20
Stocks started had their second bullish Monday in a row, and, once again, a positive vaccine-related announcement led to the broad-based rally. While the new developments could be game-changers for 2021, the next few months could still be dominated by the virus and the new wave of containment measures and travel restrictions in the U.S. The short-term risks kept a lid on the gains of the major indices, and even though the Dow, the S&P 500, and the Russell 2000 each achived all-time closing highs, the large-cap benchmarks failed to hold on to their gains from Monday. The Nasdaq and ‘stay-at-home” stocks, in particular, saw inflows in the latter half of the week, while the rally in cyclical and lockdown-sensitive issues stalled. These divergences could be here to stay until the end of the current wave of outbreaks.
While the week’s key economic releases leaned negative, the housing market and the manufacturing sector gave bulls something to cheer in the face of mounting worries regarding fourth-quarter growth. The highly-anticipated retail sales report missed expectations across the board, and last month’s strong readings were also revised lower. Since the weekly number of new jobless claims jumped higher unexpectedly as well, the outlook for the consumer economy clearly deteriorated ahead of the start of the holiday season. The NAHB Housing Market Index, housing starts, building permits, and existing home sales all came in well above the consensus estimates, meaning that the housing market had a blockbuster October. The Philly Fed Index beat expectations, while industrial production and the CB Leading Index matched forecasts. And while the Empire State Manufacturing Index missed, the manufacturing sector will likely remain a bright spot in the coming months.
The technical picture remains clearly bullish across the board, with both the rising short- and the long-term trends being intact despite this week’s pullback. The S&P 500, the Dow, and the Nasdaq are each well above their 50-day moving averages, and the benchmarks are also clear of their 200-day moving averages. Small-caps experienced fared better and their larger peers this week, and the Russell 2000 again closed the week above both its moving averages, just below its all-time closing high. The Volatility Index (VIX) hit its lowest level since late-August thanks to the declining long-term economic uncertainty, but the “fear gauge” is still much higher than its pre-pandemic range, closing the week near the 23.5 level.
Market internals improved thanks to the Russell 2000’s strength and Monday’s broad-based rally, and the key breadth measures continue to be at or near their most promising levels of this bull market. The Advance-Decline line hit a new bull market high yet again, as advancing issues outnumbered decliners by a 3-to-1 ratio on the NYSE and a 2-to-1 ratio on the Nasdaq. The average number of new 52-week was little changed on both exchanges, dropping to 62 on the NYSE but rising to 105 on the Nasdaq. The number of new lows declined in the meantime, falling to 1 on the NYSE and 2 on the Nasdaq. The percentage of stocks above their 200-day moving average hit a new recovery high again, crossing the 80% level for the first time since 2018 and finishing the week near 79%.
Short interest continues to decline on Wall Street thanks to the improving long-term outlook, and the most-shorted issues remained relatively strong this week. Current GorillaPick, National Beverages (FIZZ), continues to trade in a bullish technical pattern following this week’s consolidation, and since its short interest is now at 67%, the stock could have plenty of gas left in the tank. Leveraged solar play, SunPower (SPWR), surged to an over five-year high thanks to the improving industry-wide trends, and the stock’s short interest of 47% could mean that the short squeeze is just beginning. Discovery Entertainment (DISCA) pushed higher throughout the week despite the mid-week pullback in the major indices, and its days-to-cover (DTC) ratio of 11 is a promising sign for bulls.
Despite the fears of a rough December for the U.S., the major indices will likely enter the holiday season only slightly below their all-time highs, and volatility could further drop following Thanksgiving Day. That said, we will have a busy start to the week in terms of economic releases, and the evolution of the current wave of outbreaks will also be very closely watched by investors. The week will start with the Markit Manufacturing and Services PMIs, with the European PMIs coming out overnight as well. The CB consumer confidence number and the Case-Shiller Housing Market Index will highlight Tuesday’s session. Durable goods orders, the Core PCE Price Index, personal spending, and new home sales will all be released on Wednesday. Despite the busy schedule, choppy and directionless trading could continue in stocks as investors will continue to be torn due to the short-term risks and the improving long-term outlook. Stay tuned!
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