It is safe to say that stocks have entered the next phase of the longest bull market in history in the wake of last week’s positive political developments. While corporate earnings have stalled somewhat in recent quarters, the “phase one” trade deal with China, the promise of the “soft” conclusion of the Brexit saga, and the Fed’s slight dovish shift were enough to trigger a memorable rally in stocks. Bears who bet on a coming recession have also been running for the exits this week, and the bullish technicals also added to the buying pressure. As we enter the illiquid holiday season, the day-to-day fluctuations might become erratic on Wall Street, but it seems that investors will close a very successful year on a positive note.
Key economic releases were mixed for the third week in a row, but the crucial consumer sector seems to be doing well, which makes another record-breaking holiday season likely. Personal income rose by the most since June, together with personal spending, the JOLTS job openings estimate jumped higher, and the IBD/TIPP optimism number also beat expectations. The manufacturing sector, on the other hand, continues to struggle, even though industrial production beat the consensus estimate in November, as the Philly Fed Index declined by much more-than-expected, and the manufacturing recession continues in Europe. The housing market had a solid month, while existing home sales declined, building permits, housing starts, and the NAHB Housing Market Index all surged higher.
The technical picture remains clearly bullish, with all of the key trend indicators still pointing higher, although stocks are slightly “overbought” due to their strong push to new all-time highs. The S&P 500, the Nasdaq, and the Dow are still well above their rising 200-day moving averages, and the benchmarks also remain above their steeply rising 50-day moving averages. Small-caps gained ground every day this week, and even though they lost their relative strength toward the end of the week, the Russell 2000 closed the week well above both of its moving averages on Friday. The Volatility Index (VIX) finally had a stable week, staying in a relatively narrow range, and it closed the week a tad lower near the 12.50 level.
Market internals deteriorated somewhat in the second half of the week. Even though the slight weakness among small-caps could be foreshadowing a pullback, the underlying bullish trend is in no danger. The Advance/Decline line continued to surge higher to new bull market highs, as advancing issues outnumbered decliners by a 5-to-1 ratio on the NYSE, and by a 6-to-1 ratio on the Nasdaq. The average number of new 52-week highs increased again on both exchanges, rising to 130 on the NYSE and 142 on the Nasdaq. The number of new lows slightly decreased in the meantime, falling to 10 on the NYSE and 37 on the Nasdaq. The percentage of stocks above their 200-day moving average continued to increase until Thursday, and the measure’s closing value of 68% is another almost two-year high.
Short interest continued to decline as the major indices hit record highs, and the most-shorted issues outperformed. The total number of bearish bets is getting close to its historical low. After drifting lower for several months, Match Group (MTCH) surged higher in the second half of the week, and since the stock’s short interest stands at 58%, it might have started a significant rally. Although Tesla’s (TSLA) short interest of 20% is not among the highest, the size of the company and its media coverage could lead to a wild period following this week’s short squeeze. Microchip Technology (MCHP) hit a new record high as well this week, and given the stock’s very high days-to-cover (DTC) ratio of 16, shorts could fuel a strong breakout in the coming weeks.
The Christmas week will be very light on economic releases, as usual, so there is not much that could change the positive trend in stocks. The durable goods report will come out on Monday, the Richmond Manufacturing Index is scheduled for Tuesday’s shortened session, while the weekly number of jobless claims will be out on Thursday. Bulls can fully enjoy their gains this holiday season, and even though a profit-taking pullback is in the cards, the recent positive catalysts could provide further fuel for the rally. Chinese leader Xi and President Trump gave another boost to investor sentiment when they praised the trade agreement between the two countries, and despite the President’s impeachment, political risk is the lowest in years. Stay tuned!
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