Weakness In Vaccine Rally Stars Points to Short-Term Trouble

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Commenting on the weakness in the stars of the vaccine rally and today’s trading Gorilla Trades strategist Ken Berman said:

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Weakness In The Stars Of The Vaccine Rally

The major indices held on to most of yesterday’s healthy gains, but the weakness among cyclical issues still warrants caution. Even though today’s afternoon session could provide a glimpse of the reflationary trends of 2021, the fact that the stars of the vaccine rally were weak could point to short-term troubles for the market.

We had a relatively quiet day at the level of the main sectors as well, although the spike in post-Fed spike in Treasury yields led to considerable divergences in the last couple of hours of trading. Consumer-related issues benefited from the positive stimulus-related news flow, despite the weak retail sales report, but most cyclical issues remained weak throughout the session. The rate-sensitive real estate sector, utilities, and energy-related stocks closed the session in the red, on average, but financials edged higher following a weak start to the day.

Following the European Central Bank’s (QE) boost to its asset purchase program, several analysts expected something similar from the Fed, which could explain the market’s slightly negative initial reaction to today’s announcements. The Fed’s message lacked new monetary measures, but the Central Bank committed to continuing its quantitative easing (QE) program until “substantial further economic progress” is made. Treasury yields and the dollar spiked higher following the Fed’s announcements and rates could continue to creep higher in the coming months.

PMI Points To Long-lasting Strength

While growth remains robust in the manufacturing sector and today’s PMI points to long-lasting strength, services and the consumer economy are under some pressure due to the resurgence of the virus. The weak retail sales data likely reflected the lack of a new stimulus deal as well, and although we finally have an agreement in sight, its impact will be delayed and several sectors might be looking at months of sluggish activity. That said, the Markit services PMI remains firmly in positive territory, which is still impressive in an international comparison even in light of today’s bullish European releases.

We are in for another busy day of economic releases, with the manufacturing sector and the housing market in the spotlight. Housing starts and building permits are both expected to remain virtually unchanged compared to last month’s great readings, but the Philly Fed Index is projected to drop to 20.1, its lowest level since September. New jobless claims are forecast to drop following last week’s surge, and hopefully, the decline in continuing claims will also resume. Stay tuned!

Headlines

  • Stocks closed flat following a choppy session on Wall Street as investors continued to focus on the stimulus talks in Washington
  • The two sides are “very close” to a deal according to the recent rumors, thanks to the latest $900 billion bipartisan proposal
  • The Fed kept its monetary policies unchanged while upgrading its economic outlook thanks to the recent vaccine breakthroughs
  • Retail sales missed by a wide margin in November, but the Markit manufacturing and services PMIs both continue to point to healthy growth in the U.S.
  • The European PMIs surprised on the upside across the board, easing the fears of a double-dip recession

Market Wrap

Index G/L Current level Year-to- date 50-day 200-day
Dow -45 30,155 5.5% 28,954 26,363
Nasdaq 63 12,658 40.4% 11,841 10,267
S&P 500 7 3,701 14.4% 3,537 3,183
Russell 2000 -6 1,954 16.8% 1,722 1,472

Decliners outnumbered advancing issues by a 3-to-2 ratio on the NYSE today, with 116 stocks hitting new 52-week highs and 4 stocks hitting new 52-week lows, while volume was well below average.

Price Action Gauge ******** (reading for 12/16: 69)

While the major indices finished mixed, bulls should still be delighted by today’s price action, as investors shrugged off the slightly disappointing Fed announcements, and the Nasdaq even scored a new record high.

Oversold/Overbought Gauge ******** (reading for 12/16: 27 Color: green)

The most reliable momentum indicators flattened out this week after turning lower during last week’s pullback, but as the major indices are still overbought according to them, further consolidation is possible before a broad-based push to new all-time highs.

 

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