State of the Stock Market Analysis for the Week Ending on  January 31st Slight Deterioration in the Key Economic Releases | State of the Stock Market 1-31-20All You Need Is Jobs

Stocks entered a volatile pullback this week, following a long period of relatively quiet trading on Wall Street, with the controversial short squeeze among the most-shorted issues triggering a profit-taking event. The string of negative reactions to even the strongest earnings reports also continued, with a few exceptions from the tech, industrial, and healthcare sectors. Apple’s weakness was especially puzzling in light of the company’s record-breaking numbers. Just looking at the figures, the recovery continued in the fourth quarter, but questions surrounding the vaccine rollout and the Biden administration’s next moves might raise doubts regarding the coming months. That said, the astronomical amount of global stimulus and momentum of the U.S. economy should provide strong tailwinds for stocks, so the current pullback will likely prove to be another buying opportunity.

The slight deterioration in the key economic releases continued this week, despite a few promising indicators, but the long-term outlook is still improving, and the stimulus deal could soon solve some of the current issues. Consumer-related measures took the biggest short-term hit, with personal spending, personal income, the Core PCE Price Index, and the CB consumer confidence number all considerably missing expectations. The better-than-expected Richmond Manufacturing Index and weekly jobless claims report made bulls smile, and the final reading of the third-quarter GDP print also surprised on the upside. The housing market sent mixed signals, as existing home sales remained strong, the Housing Price Index was above the consensus estimate, but new home sales missed by a wide margin in November.

Despite a few notable bearish surprises, such as the first reading of the fourth-quarter GDP print, the week’s economic numbers were encouraging, with even the struggling job market giving bulls reasons to smile. New jobless claims were well below expectations, the Chicago PMI hit a new two-year high, personal spending and personal income were both above the consensus estimates, and the CB consumer confidence number and the Core PCE Price Index also hinted at improvements in the consumer economy. Crude oil inventories plunged unexpectedly by 10 million barrels, but on a negative note, the Richmond Manufacturing Index and new home sales missed, and the durable goods report was mixed, at best.

Short-term technicals took a hit this week, especially in the main cyclical sectors, and a more substantial pullback looks possible in the major indices. The Nasdaq is still clearly above its 50-day moving average, but the Dow and the S&P 500 closed the week below their short-term indicators, with the benchmarks all being well above their 200-day moving averages. Small-caps have been under pressure throughout the week, but the Russell 2000 is still holding up above both its moving averages following its historic rally. The Volatility Index (VIX) exploded higher amid the wild swings in the large-cap benchmarks, hitting a three-month high near the 40 level, and it closed the week well above its recent range, close to 33.5.

Market internals deteriorated further as small-caps struggled, but the most reliable breadth indicators are still firmly in bull market territory. The Advance-Decline line plunged lower due to the broad-based pullback, as decliners outnumbered advancing issues by a 7-to-1 ratio on the NYSE and a 6-to-1 ratio on the Nasdaq. The average number of new 52-week highs declined sharply on both exchanges, falling to 81 on the NYSE and 110 on the Nasdaq. The number of new lows remained very low in the meantime, hovering around one on the NYSE and two on the Nasdaq. The percentage of stocks above their 200-day moving average dropped yet again, hitting its lowest level this year and closing the week near 85%.

Short interest plunged lower on Wall Street as retail investors caused massive short squeezes in several of the most-shorted issues, such as GameStop (GME) and AMC (AMC), and volatility has been unprecedented in this segment of the market. SunPower (SPWR) benefited from the trading frenzy as well, while the volatility of its stock was relatively low, and its short interest still stands at 57% following the crazy week. ViacomCBS (VIAC) still sports a high days-to-cover (DTC) ratio of 9, but, like in the case of the other stocks impacted by this week’s volatility, investors should be aware of the elevated short-term risks.

While we are in for a slightly less busy week in terms of economic releases and earnings, there will still be plenty of potential catalysts to cause turmoil on Wall Street. The ISM manufacturing and services PMIs are scheduled for Monday and Wednesday, respectively, the ADP payrolls number will also be released on Wednesday, while the government jobs report will be in focus on Friday’s session. Amazon (AMZN), Google parent Alphabet (GOOG), Paypal (PYPL), Exxon (XOM), and healthcare giants Pfizer (PFE), Merck (MRK) will be among the firms reporting next week, and investors are hoping for more bullish post-earnings moves than in the past two weeks. Stay tuned!

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