Weighing The Week Ahead: What Is The State Of The Recovery?

We have a normal economic calendar with a focus on sentiment and inflation data. Economic reports remain secondary to Mr. Market. It has been a lights on, lights off situation with celebration of pandemic news and improvements in the Washington situation.

We know much more than we did a month ago. It might not be a clear crystal ball, but it should be easier to identify key risks. It is time for investors to ask: What is the state of the economic recovery?

Last Week Summary

In my last installment of WTWA, I pondered the matter of trading algorithms, especially in low volume, headline-driven markets. I was also concerned about the many possible negative headlines.

In fact, trading volume was normal except for the partial session on the Friday after thanksgiving. There was no evidence of more algo activity than usual. And I was also wrong about the headline news. Reader charles3108 at Seeking Alpha had a better handle when he suggested:

Possible good news:

-Trump talks about the transition

-Biden talks about spending

Whatever was behind it, Mr. Market celebrated the holiday week with a gain of 2.3%, to which we have added 1.7% last week.

My concerns were misplaced.

Key Charts

I always start my personal review of the week by looking at some great charts. This provides a foundation for considering news and events. Whether or not we agree with Mr. Market, it is wise to know his current mood.

Market Story

This week I am featuring Jill Mislinski’s chart of the market week. Her approach combines several key variables in a single readable format.

From several helpful charts in Jill’s post, here is one showing the market to record highs and the drawdowns along the way.

Sector Trends

Sector movement is another important clue to market trends.

Once again, Juan Luque provides us with some words of wisdom from the Incline trading desk:

The S&P 500 was up 1.67% this week with all sectors positive except Consumer Discretionary and Utilities. Energy continues to be the big winner in the past weeks with almost a 5% return this week. Real Estate, Consumer Staples, and Industrials have lost momentum and are moving towards the lagging and weakening quadrants. The Financials sector is strengthening and is approaching the leading quadrant. The Communication Services is rotating rapidly and moving straight towards the leading quadrant too. With the prospects of Covid-19 vaccine news and possible additional stimulus, investor’s sentiment is bullish as we navigate markets at all-time highs.

Comment

The market gained 1.7% on the week with a trading range of 2.9%. You can monitor volatility in my Indicator Snapshot, featured in the Quant Corner.

Noteworthy

Statista shows the timeline for the Pfizer/BioNTech vaccination process.

The News Overview

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too.

My continuing assessment is that many of the normal economic indicators are not helpful in the wake of the COVID lockdown decline. Too many sources are focused on a change in direction, even if very modest, which has painted an overly optimistic picture. As the economy stalls, there will be a rapid switch in the diffusion indexes. The early signs are emerging.

New Deal Democrat’s high frequency indicators are all valuable in normal times, validated by his approach in designing the package. Since the start of the pandemic the interpretation has been more challenging, as his conclusions have often indicated. The current weakness in the “nowcast” group is helpful in identifying the strength of economic activity as well as the direction. Take a special look at this section, where NDD has helpfully provided the best and worst results, with dates, along with the current reading.

Good

Basic Activity Indicators:

  • Construction spending for October increased 1.3% beating expectations of 0.7% and September’s -0.5% (downwardly revised from a gain of 0.3%).
  • Factory orders for October increased 1.0%, beating expectations of 0.8%. This was also better than September’s 1.3% (upwardly revised from 1.1%).

Please note that these are both October reports.

Stimulus

It is far to soon to declare victory on the passage of a stimulus bill, but there are finally some signs of progress. There is now a bipartisan coalition reaching some agreements. There is also pressure to act before the unemployment aid packages expire the day before Christmas.

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