The signing of the “phase one” trade deal between the U.S. and China dominated headlines this week, and while the initial reaction to the final version of the agreement was mixed, at best, the week ended on a clearly positive note. Stocks hit new all-time highs across the board, with all of the key large-cap benchmarks, even the previously lagging Dow, leaving behind the dip that was caused by the U.S.-Iran tensions. The first batch of fourth-quarter earnings reports came out as well, with a focus on the financial sector. As was the case in the past few quarters, most of the companies beat the consensus estimates, boosting investor confidence in the second half of the week, and it seems earnings could provide the next bullish catalyst.
The key economic releases were mixed following a clearly bullish week, but the most important forward-looking indicators were particularly strong, which helped fuel the record-breaking rally in stocks. The Philly Fed Index and retail sales were very strong, with the former measure hitting its highest level in five-month, and while the Michigan consumer sentiment number and building permits missed, housing starts surged higher in December. The Producer Price Index (PPI) and Consumer Price Index (CPI) reports were weaker-than-expected, but while the mild price pressure could indicate demand-side weakness, the relatively low inflation makes the Fed’s position easier amid the global economic weakness.
Since the major indices all closed at record highs on Friday, the technical picture remains bullish across the board, and key trend indicators confirm the bullish case on Wall Street. The S&P 500, the Nasdaq, and the Dow are well above their rising 200-day moving averages, and the benchmarks also remain above their steeply rising 50-day moving averages. Small-caps had a very strong week, with the Russell 2000 advancing four days in a row before Friday’s slight dip, is still above its short- and long-term moving averages. The Volatility Index (VIX) erased its Iran-spike and finished the week at its year-to-date low near the 12 level on Friday, as investors continue to be hungry for risk.
Market internals improved significantly thanks to the rally in small-caps, and the most reliable breadth measures all continue to confirm the ongoing bull market. The Advance/Decline line surged to new bull market highs yet again, 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 jumped higher on both exchanges, rising to159 on the NYSE and 154 on the Nasdaq. The number of new lows edged lower, falling to 10 on the NYSE and falling to14 on the Nasdaq. The percentage of stocks above their 200-day moving average hit 72.5% on Friday, finishing the week above 70% for the first time since mid-2018.
Short interest continued to collapse on Wall Street, leading to spectacular short squeezes in stocks like Tesla (TSLA), as investors are facing less political and economic risks thanks to positive developments in recent weeks. Planet Fitness (PLNT) continues to flirt with its all-time high from last year, and with its short interest still being above 70%, the stock is a strong candidate for a short squeeze. Match Group (MTCH) is also sporting a very high short interest of 58%, and it got very close to its record high this week as well. Current GorillaPick, Hormel Foods (HRL), finally broke out to a new high this week, following over a year of consolidation and the stock’s very high days-to-cover (DTC) ratio of 19 means that shorts could fuel an epic rally.
Besides the crucial economic releases, the Fed’s rate decision, and corporate earnings will be at the center of attention next week, so we could be in for another eventful week. The durable goods report will be out on Tuesday, together with the CB consumer confidence number and the Richmond Manufacturing Index, the Fed meeting will conclude on Wednesday, the first reading of the fourth-quarter GDP will be out on Thursday. The week will end with the Fed’s favorite inflation measure, the core PCE Price Index, personal spending and the Chicago PMI. Thus, by the end of the week, we could have way more information about the Fed’s possible strategy for the rest of 2020. Stay tuned!
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