Stock indexes finished the week at new record highs in spite of some pretty shocking political drama. President Trump took to Twitter last night in a +2 minute video saying the people who stormed the Capitol “do not represent our country” and that lawbreakers “will pay.” He conceded that Congress had certified the election results and that “a new administration will be inaugurated on January 20”. Trump also added, “Serving as your president has been the honor of my lifetime.”

Democrats were declared the winners in both Georgia Senate runoff elections last week but the real headlines came from DC where the Capital went into lockdown, officials were evacuated, additional National Guard troops were called up, and a female Veteran was shot and killed.

Wall Street seems to be viewing the violence, upheaval, and Georgia elections as just another day. However, if the violence spreads to more cities and things continue to escalate between now and the inauguration, I suspect some large investors might get increasingly nervous and a bit uncertain which could shift the dynamics.

Fundamental analysis

Most large investors also believe the Treasury, which is slated to be led by a very dovish Janet Yellen (pending confirmation), will push against any big tax hikes as such moves could impede the economic recovery and slow job creation. Remember, Yellen is a huge proponent of working towards and deploying tools to reach full-employment.

Some on Wall Street are now arguing that the so-called “old economy” stocks in the Dow can benefit greatly from more economic stimulus from the Democrats while tech stocks could be at risk from stricter antitrust scrutiny.

Also, expectations are also very high for additional and generous stimulus with the Democrats now controlling the Senate. Bulls see the extra government help keeping the economy supported until we are “over the hump” so to speak.

Is sP500 setting for a pullback? Technical analysis

Economic data

Economists expect the labor market will probably remain sluggish as the U.S. moves through this wave of the virus. However, bulls argue that weakness in some areas of the economy is being more than made up by big gains in other areas, such as Housing and Manufacturing. Moreover, most of the experts see vaccinations being widespread and a return to normal taking shape by this Summer or possibly sooner.

Turning to new trading week, there is quite a bit of key economic data on the calendar including the Consumer Price Index and the Fed’s Beige Book on Wednesday; Import/Export Prices on Thursday; and Business Inventories, the Producer Price Index, Empire State Manufacturing, Retail Sales, Industrial Production, and Consumer Sentiment on Friday. Fourth-quarter earnings season also gets its “unofficial” start with big banks JPMorgan, Citigroup, and Wells Fargo announcing results on Friday. Earnings season can become a fundamental trigger for a deep pullback in the stock market.

Technical analysis

SP500 is approaching 168.8 Fibo extension at 3860. Cycles and Intermarket Forecast point possible peak between January and February. Advance Decline Line has been just light in the darkness for SP500 traders during recent years. It is neutral now and likely it will take another few weeks for ADL to form some signal. 

Is sP500 setting for a pullback? Technical analysis

Fed Funds Forecast continues to support bullish bias in the stock market. With all that in mind investors have to be cautious with their positions as risk of deep pullback is increasing.

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Wishing you a great week!

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