E US Stock Market Weekly Review February 8 – 12, 2021

A second consecutive week with gains for major US stock indices, although modest this week, with the US stock market near its record highs. Consolidation is likely, and a correction too. With most of the companies having reported earnings and revenue that beat estimates, the question now is what can drive the stock market higher? Profit-taking and concerns about valuation can send stock indices and stocks lower, but what about higher?

For sure the rollout of coronavirus vaccines combined with declining case trends can build momentum for stocks in 2021.

A strong trend that I have mentioned back in late 2020 and is building momentum is small-cap stocks. Mid- and small-caps perform better compared to large-cap stocks, and value investing is another trend worth monitoring in 2021.

Fiscal stimulus though essential to support the economy now has also some negative implications. If a large part of stimulus checks support is directed to buying stocks, then the syndrome of irrational exuberance and wild stock price moves supporting the speculative frenzy may persist. Once this is stopped, logic should return to the stock market. Stocks with good fundamentals at attractive valuation should trade higher and those with unjustified financial key metrics should have a correction.

Key trends to watch are employment, inflation, and consumer confidence. The latter should improve with the rollout of vaccines. And inflation should also pick up with high oil prices.

The best signal that is still a very long prospect to support the economic growth would be the Fed to start increasing gradually the benchmark key rate. It would mean that inflation is picking up, demand for goods and services is also improving, and we know that consumer spending is a cornerstone for high economic growth.

Putting the short squeeze trend aside, short selling is not going to disappear. And speculating trading will also be probably present. Many stocks either go unnoticed or are too hard to get manipulated, and these stocks do not make headlines.

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Disclosure: I have no position in any stock mentioned

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