State of the Stock Market Analysis for the Week Ending on  February 7th Volatile Week to Go Down in History | State of the Stock Market 2-7-21All You Need Is Jobs

Following a volatile week that will certainly go down in history because of the Reddit-fueled short squeeze in names like GameStop (GME) and AMC (AMC), stocks staged a quick and decisive comeback this week. The positive COVID trends in the U.S. and globally, the bullish-leaning economic numbers, the upbeat corporate earnings, and the promising stimulus-related developments all fueled the rally, with the S&P 500 and the Dow rising on all five sessions amid the plunge in volatility. Global stocks and other risk assets such as crude oil also joined the advance, despite the rally in the dollar, and so all looks set for another leg higher in the bull market.

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.

Following weeks of weaker-than-expected economic numbers, we finally got a batch of promising releases, although the pressure on the job market continues to be apparent. The weekly number of new jobless claims was 900,000 again, but that was still below the consensus estimate, and last week’s reading was revised lower as well. The Philly Fed Index, building permits, housing starts, the Markit manufacturing and services PMIs, and existing home sales all smashed expectations, and even the struggling European economies showed resilience in the face of the new wave of containment measures.

The key economic releases showed encouraging signs for the second week in a row, with nearly all of the forward-looking and high-frequency measures beating expectations. The ISM services PMI, new jobless claims, construction spending, factory orders, the Challenger job cuts estimate, the Ward vehicle sales number, and the IBD/TIPP economic optimism number all confirmed the accelerating recovery with only the ISM manufacturing PMI, hourly earnings, and non-farm payrolls missing expectations. In light of the bullish trends, it’s no surprise that Treasury yields and the dollar gained ground this week, as, especially compared to Europe, the domestic economy remains very strong.

The technical picture turned bullish across the board once again despite last week’s deterioration, and the major indices are all trading at or near their all-time highs thanks to this week’s winning streak. The S&P 500, the Dow, and the Nasdaq are all back above their 50-day moving averages, and the benchmarks are still well clear of their 200-day moving averages. Small-caps not just recovered from their pullback, but the Russell 2000 hit a new all-time high ahead of the large-cap benchmarks and finished the week well above both its moving averages. The Volatility Index (VIX) remained in the spotlight throughout the week, plunging back below its 50- and 200-day moving averages thanks to the positive catalysts, and it closed the week just above the key 20 level.

Market internals improved significantly thanks to the broad-based rally, and the key breadth measures continue to point to more upside for stocks in the coming months. The Advance-Decline line surged to a new bull market high yet again, as advancing issues outnumbered decliners by a 10-to-1 ratio on the NYSE and a 9-to-1 ratio on the Nasdaq. The average number of new 52-week highs increased on both exchanges, rising to 81 on the NYSE and 141 on the Nasdaq. The number of new lows edged lower in the meantime, falling to 1 on the NYSE and 2 on the Nasdaq. The percentage of stocks above their 200-day moving average bounced back as well, getting close to its recent decade-long high and finishing the week near 90%.

Short interest increased somewhat amid the normalization among most-shorted issues, but several of the most promising candidates for a sustained rally held up well despite the turmoil. Altis (ATUS) was among the heavily-shorted stocks that weren’t impacted by the trading frenzy, but bears could still be in trouble in the coming weeks, should the broad-based rally continue as the stock’s short interest is still at 76%. SunPower (SPWR) pulled back together as the most-shorted issues tanked, but its losses were much less pronounced, and the fundamental story behind the stock’s rally remains intact, with its short interest also being at a very high 57%. ViacomCBS (VIAC) also remains in a clearly bullish trend following this week’s consolidation, and since the stock still sports a days-to-cover (DTC) ratio of 9, more recovery highs could be ahead.

We will have a relatively quiet week of economic releases following this week’s busy schedule, and as the earnings season is also nearing its end, trading volume and volatility might drop. The JOLTS job openings estimate will be out on Tuesday, the Consumer Price Index (CPI) is scheduled for Wednesday, the Fed’s monetary policy report will highlight Thursday’s session. The week will end with the Michigan consumer sentiment number. The ongoing push to pass President Biden’s stimulus package could also make waves on Wall Street, but should the promising COVID trends remain intact, the bullish trend will likely continue, and we could be in for more record highs in the major indices. Stay tuned!
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