While the week began in an unusually volatile fashion ahead of the Christmas break, the major indices settled down, later trading in relatively narrow ranges. The picture was less uniform at the key sector level as the impact of the stimulus deal, the fears of the new strain of the virus, and the twists-and-turns of the Brexit negotiations led to significant divergences. The energy sector was especially volatile due to the travel new restrictions in Europe, but consumer-related issues were also active due to the stimulus deal and the weaker-than-expected economic releases. Despite the surprisingly hectic week, investors can be content with developments on Wall Street, as stocks continue to be resilient to negative catalysts and seem to be ready to continue the bull market in 2021.
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.
The short-term technical picture remains clearly bullish despite this week’s choppy price action, and the late-year long-term technical breakout is intact, promising another bullish year for stocks. The S&P 500, the Dow, and the Nasdaq are still each above their rising 50-day moving averages, and the benchmarks are also above their 200-day moving averages. Small-caps continued to lead the advance thanks to the stimulus deal, and the Russell 2000 broke above 2,000 for the first time ever while remaining well above both its short- and long-term moving averages. The Volatility Index (VIX) skyrocketed on Monday, hitting its highest level since early-November, but the “fear gauge” quickly plunged back near its range from last week and closed the week only slightly higher, near the 21 level.
Market internals continue to confirm the ongoing bull market, and some of the key breadth measures even improved thanks to the rally among small-caps. The Advance-Decline line finished the choppy week flat, staying within striking distance of its recent bull market high, as advancing issues outnumbered decliners by a 5-to-4 ratio on the NYSE and a 2-to-1 ratio on the Nasdaq. The average number of new 52-week highs declined to 105 on the NYSE this week but surged higher to 210 on the Nasdaq. The number of new lows declined on both exchanges in the meantime, edging lower to 2 on the NYSE and 4 on the Nasdaq. The percentage of stocks above their 200-day moving average continues to be very high, even from a historical standpoint, and the measure closed the week near 86.5% yet again.
Short interest declined again despite the brief spike in the VIX, as the most-shorted issues continue to outperform thanks to the improving long-term outlook for the economy and equities. SunPower (SPWR) continued its relentless surge, finally hitting a new all-time high, and with its short interest still at 52%, there might be more pain ahead for bears. iRobot (IRBT) also sports a high short interest of 36%, and after breaking out of a multi-month consolidation pattern, the stock could be ready to take off again. ViacomCBS (VIAC) might be on the verge of a breakout as well following this month’s shallow pullback, and its days-to-cover (DTC) ratio of 10 means that shorts could provide sufficient “fuel” for another leg higher in the stock’s recovery.
While we are in for another holiday-shortened week, and the domestic economic calendar will be very light on key releases, the last week of the year often provides clues regarding the underlying trends across asset classes. With many large institutions and short-term traders absent from the market, price action is determined by more “organic” forces, so even the usually illiquid and choppy days could see interesting moves. As for the economy, the Case-Shiller Housing Price Index will be out on Tuesday, the Chicago PMI and pending home sales are scheduled for Wednesday, while the week and the year will end with the jobless claims report on Thursday. Stay tuned!
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