Hang on for the Home Stretch

A relatively benign economic calendar this week and a dwindling number of companies yet to report Q3 results will allow traders to focus on calendar-centric year-end trading, whatever is left of the political drama before President Trump concedes to President-elect Biden, COVID-19 and vaccine updates, and the prospect of a COVID-19 relief package before yearend.

As clearly illustrated in the charts below, all three major US equity market indices closed at record highs last week. The Dow Industrials broke the 30K barrier with conviction as we had hoped. The previous week, the Nasdaq Composite broke its 12K level with conviction and last week added additional distance between its closing on Friday and its 50 DMA – both of which we were very pleased to see.

I would like to have seen volume tick higher on Friday. NYSE volume on the session was off 1.03%. The Nasdaq volume fell 2.48%. Not only are all three major market indices currently trading at record highs, but all three are also well above their respective 50 DMA, 200 DMA and all three are posting rising 10 DMA’s as a result of the most recent charge higher into record territory. Additionally, the Volatility Index (VIX) has slumped to a post-Covid-19 shock low on Friday.

US equity markets closed out last week in a confirmed uptrend.

The trade higher – that is lifting all boats – is very likely going to run into some headwinds by year-end as I touch on below. That said, for the week, the Dow added 307.89 points or 1.03%. The S&P 500 added 60.77 points or 1.67%. The Nasdaq Composite added a stunning 258.39 points or 2.12%. And though a rising tide does lift all boats, it lifts some higher than others. In this case, the outperformance by the Nasdaq Composite relative to the Dow Industrials and S&P 500 has been a familiar theme since our trade-off of the Covid-19 March lows. Whether it has been the stay at home stocks, or telemedicine names, or software and consumer-facing stocks, rotation between tech sectors has bolstered the Nasdaq Composite handsomely and has allowed it to remain in the pole position in terms of relative performance.

The dividend rich landscape of the Dow Industrials has waned in relative performance due in large part to the fact that investors have forsaken dividends and the perception of relative consistency in favor of growth – pure and simple. And frankly, they have been rewarded for it over the past 52-week period. Will that trend continue? I do expect it to. There will always be an appetite for solid, dividend-centric listings by investors – just less relative appetite than may have existed in the recent past. The domestic and global economies are going through a revolution that continues to gain momentum. That revolution, or transformation, continues to reward workforce reimagination and what is expected to be the employment landscape of the future.

Taking a step back and taking a look at the bigger picture, those trends are even less subtle. Over the past year, the Dow Industrials have gained 9.29%. The S&P 500 has gained 18.84%. Not shabby. However, the Nasdaq Composite has added 45.50% over the same period.

I expect a “reversion to the mean” trade to take shape over the next four weeks. That “reversion to the mean” will likely trigger a retest of 50 DMAs across all three majors – at a minimum. It will take a degree of froth out of the market, reduce stretched valuations, and will provide a necessary reset for an additional punch higher – one that I suspect will take shape by mid-February. Traders will look to take advantage of the upcoming weakness in equities by trading the short term and hope to catch the bottom on the reversal. Investors will be hoping to add to positions on weakness.


Last week’s economic calendar highlights:

The Chicago Purchasing Managers Index, released by the Institute For Supply Management – Chicago (Chicago PMI) was released on the last day of November. It was 58.2 – modestly lower than both consensus (59.2) and the previous month’s reading of 61.1. The manufacturing index (ISM Manufacturing) for November came in at 57.5. Again, modestly lower than consensus (57.7) and the prior reading of 59.3.

Weekly Jobless Claims, released Thursday morning, came in significantly stronger than both the prior week’s revised reading (787 K) and consensus of 780 K. They were 712 K. Initial jobless claims dropped by 75 K. The 4 week-Moving Average slipped to 739.5 K.

Without question, the most significant economic release last week was the Monthly Employment Report for November, released Friday. Nonfarm payrolls M/M were 245,000 which allowed for the unemployment rate to drop to 6.7% from 6.9%. However, the LFPR slipped from 61.7 to 61.5. Private payrolls M/M were 344,000 and manufacturing payrolls rose by 27,000. Let’s face it, The Employment Report was a disappointment and in and of itself should not have fueled a trade higher on Friday. However, investors expect that the weaker than expected employment data may lead to the quick passage of a U.S. coronavirus relief package from Washington DC.


This week’s economic calendar highlights:

 One of my favorite monthly data releases, the NFIB Small Business Optimism Index, is due out on Tuesday morning. Though technically not considered a market-moving release, no shortage of old-timers like myself find it very insightful. This week’s release is for November. Econoday consensus is 102.8 versus last month’s reading of 104.0. Given all the challenges the American economy has faced and the ongoing challenges that continue to present themselves as a result of COVID-19 shutdowns, I find it rather impressive that this reading has remained as elevated as it has been.

The Consumer Price Index (CPI) reading for November is due out on Thursday morning. The CPI is the first of two important inflation readings of the week. It should come as absolutely no surprise to see this release reflect virtually no inflation at the consumer level again. You will remember that last month’s topline reading was 0.0%. Econoday consensus for this release is 0.1%. On a Y/Y basis, the CPI stands at 1.2% as of October.

Weekly Jobless Claims data for the week ending 12/5 are out Thursday at 8:30 am. Initial Claims last week were 712 K. Consensus is 707 K for this release. Though last week we saw a solid drop in claims (-75 K), that is not expected to repeat itself this week. The 4-week moving average in last week’s report was 739 K. That should tick lower this week with a modest improvement in the top line reading.

The November Producer Price Index-Final Demand (PPI-FD) reading will be released by the Bureau of Labor Statistics (BLS) Friday morning. There is a great deal of data in these monthly releases. All of it currently outlines an inflation-free economic landscape. The PPI-FD M/M reading is expected to be 0.1%. On a Y/Y basis, the PPI-FD is expected to be 0.7%. Ex-Food, Energy & Trade Services, the reading for last month was 0.8%. It should not wander far this month.

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Flickr photo: By philwirks