U.S. stocks surged to new, all-time highs in the first half of the week, but the confusing Chinese reports concerning the extent of the coronavirus epidemic shook investors’ confidence later on. The major indices still finished the week in the green, but safe-haven assets remained strong, and we saw some deterioration “under-the-hood.” The fears of a severe slowdown in China also boosted the dollar since U.S. assets are more and more attractive in a global comparison. The Dollar Index (DXY) closed the week at its highest level since early 2017, and while Fed Chair Jerome Powell reassured investors that the Central Bank is monitoring risks, the relative strength of the currency could soon start to hurt the profitability of export-focused firms.
The key economic releases were weaker than in recent weeks, but there is still no reason to expect a recession in the U.S., despite the continued global weakness in the manufacturing sector and the unknown extent of the slowdown in China. That said, industrial production declined once again in the U.S., while core retail sales missed expectations, and the JOLTS job openings estimate also provided a bearish surprise. The headline retail sales number, on the other hand, was in-line with optimistic estimates, the weekly number of new jobless claims remained surprisingly low, while inflationary pressures also remain tame, even without accounting for the effects of the coronavirus epidemic.
The technical picture continues to be bullish in all time-frames, and since the recent pullback reset the overly positive sentiment indicators, the explosive rally might continue in the coming weeks. The S&P 500, the Nasdaq, and the Dow all remain above their rising 200-day moving averages, and the benchmarks also closed the week above their steeply rising 50-day moving averages. Small-caps finally had an encouraging week, up until Friday, at least, but the Russell 2000 is still much weaker than its large-cap peers, despite finishing the week above both its moving averages. The Volatility Index (VIX) hit a three-week low as the coronavirus-related fears eased, but the index still closed above its flat 50-day moving average on Friday, near the 13.5 level.
Market internals further improved in the first half of the week, but since small-caps continue to lag behind the broader market, the most reliable breadth indicators are still showing negative divergences. The Advance/Decline line hit a marginal new bull market high before retreating in the second half of the week, as advancing issues outnumbered decliners by a 3-to-1 ratio on the NYSE, and by a 4-to-1 ratio on the Nasdaq. The average number of new 52-week highs increased again on both exchanges, jumping to 153 on the NYSE and 121 on the Nasdaq. The number of new lows also increased, rising to 50 on the NYSE and 53 on the Nasdaq. The percentage of stocks above their 200-day moving average was flat despite the new all-time highs in the major indices, closing the week near the 66% level.
Short interest was little changed on Wall Street, as the most-shorted stocks performed in-line with the broader market amid the mixed news flow and the continued uncertainty with regards to the global economy. Planet Fitness (PLNT) continued to push higher into uncharted territory, and since its short interest is still above 60%, bears could be in for a rough period. Sea Limited (SE) continues to burn shorts as well, hitting yet another all-time high this week, and as the stocks short interest is still above 40%, it might have more fuel in the tank. Henry Schein (HSIC) has been struggling to hit a record high, despite getting very close to its high from 2017, but since its days-to-cover (DTC) ratio is now at 19, an explosive breakout could be ahead.
While the stock market will be closed for President’s Day on Monday, we will still have a very busy week in terms of economic releases. The NAHB Housing Market Index and the Empire State Manufacturing Index will be out on Tuesday, the Producer Price Index (PPI) and the FOMC meeting minutes will highlight Wednesday’s session, while the Philly Fed Index and the Markit Manufacturing and services PMI’s will be released on Thursday and Friday, respectively. The manufacturing indicators will be closely watched due to the recent mixed signals from the sector, but since China continues to be the main risk for the global economy, the coronavirus-related headlines will likely continue to dominate the day-to-day price action in stocks. Stay tuned!
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