4Q20 Earnings Probably Decide If Already-Extended Extends Further Into Extended Territory Or Unwinding Begins

On Inauguration Day, US stocks pushed further into record territory. Concurrently, several indicators already find themselves in uncharted territory. The ongoing earnings season can decide if already-extended further extends into extended territory or unwinding begins.

US stocks welcomed the Joe Biden presidency by posting new record highs. Large-, mid-and small-caps all made new intraday highs on Wednesday; the S&P 500 Large Cap Index rallied 1.4 percent to 3851.85, with a new intraday high of 3859.75 – past the prior of 3826.69 from the 8th (this month).

With this, bulls have carved out new short-term support at 3820s. Only 11 sessions ago, on the 4th, crucial support at 3640s was defended, with an intraday low of 3662.71. In December, 3640s was defended twice. This level has a memory attached to it as on November 9 when Pfizer (PFE) announced its positive vaccine news bulls aggressively bought the index but only to close 95 points lower from the intraday high of 3645.99. As long as this level is intact, they deserve the benefit of the doubt.

With two sessions to go this week, once again, bears seem unable to cash in on a potentially bearish formation. Two weeks ago, a hanging man formed on the weekly (Chart 1), but this pattern needs confirmation.

Equity bulls could not be happier how the year has gotten off. There are still six trading sessions left before the month is out, so things can always change. Thus far, the S&P 500 is up 2.6 percent. As overbought as the technicals are, bears have not had any traction. From their perspective, the risk is that overbought stays overbought longer than expected.

Take a look at Chart 2. It tallies the 10-day moving average of the CBOE equity-only put-to-call ratio. It made a new low of 0.388 on Wednesday. Ironically, if the metric followed how it behaved mostly in the past, the ratio would have begun to unwind from the low-0.50s. This time around, it just kept going lower – further and further into uncharted territory. Since November 13, the 10-day average has been in the 0.40s or lower, with seven of them in the 0.30s.

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