Financial markets were very active this week. Despite the long weekend and last week’s choppy price action, and the major indices finished mixed. We saw a rotation out of the past few months’ leaders, with small-caps and tech stocks underperforming the energy, financial, and materials sectors, which closed the week in the green. The Treasury market also had a huge week, with yields surging higher, especially on the long-end of the curve, hitting their highest level since mid-March amid the hopes of a quick economic recovery. Politics took a backseat in the wake of former President Trump’s acquittal, but the push to pass President Biden’s stimulus proposal continues, and it could be the prime topic in the coming weeks.
The blowout retail sales report stole the show this week, in terms of economic releases, as the stimulus payments and the improving economic outlook led to more than a 5% increase in spending according to both the headline and core measures. The Philly Fed Index, the Empire State Manufacturing Index, and industrial production proved that the recovery remains on track in the manufacturing sector as well, but the job and housing markets could still cause headaches for investors. The NAHB Housing Market Index and building permits beat expectations, but housing starts missed, and the weekly number of new jobless claims hit a one-month high.
The short-term technical picture deteriorated, especially in the case of the Nasdaq this week, but the bullish long-term trends are in no danger, and the improving fundamentals make anything more than an orderly correction unlikely. The S&P 500, the Dow, and the Nasdaq are still all above their rising 50-day moving averages, and the benchmarks are also well clear of their rising 200-day moving averages. Small-caps have been showing relative weakness for the second week in a row, with the Russell 2000 edging lower in choppy trading, but the index remains above both its moving averages. The Volatility Index (VIX) had an active week spiking up to its 50-day moving average several times, but the “fear gauge” closed the week back above the key 20 level.
Market internals continued to weaken this week due to weakness among small-caps, but the damage has been limited, and the key breadth indicators are still firmly in bull market territory. The Advance-Decline line drifted lower, closing clearly below its recent bull market high, as decliners outnumbered advancing issues by a 5-to-3 ratio on the NYSE and a 2-to-1 ratio on the Nasdaq. The average number of new 52-week highs declined on both exchanges, dropping to 144 on the NYSE and 205 on the Nasdaq. The number of new lows was virtually unchanged in the meantime, holding steady at zero on the NYSE and two on the Nasdaq. The percentage of stocks above their 200-day moving average edged lower for the second week in a row, spending the week below the 90% level and finishing near 88% on Friday.
Short interest remained stable in the aftermath of the Reddit-fueled short squeezes, but options markets point to extremely bullish sentiment among investors. International Flavors (IFF) drifted higher in the face of the market-wide pullback, and since its short interest still stands at 51%, the stock could be ready to pop again. Altice USA (ATUS) turned sharply lower in the wake of its earnings report but found support near its year-to-date low this week, and with its short interest at 59%, it might re-test its recovery high soon. Under Armour (UA) showed up on the list of stocks with the highest days-to-cover (DTC) ratios, with a reading of 7, and since the stock just erased its COVID-related losses, it could be ready to burn the most persistent bears.
With the earnings season being virtually over and the economic calendar relatively light on key releases next week, the stimulus-developments and the Treasury market could take center stage. The CB consumer confidence number will be out on Tuesday, new home sales will highlight Wednesday’s session, the durable goods report will be released on Thursday, while the Core PCE Price Index, the Chicago PMI, and personal spending could make waves on Friday. Technicals could also play an important role in light of this week’s mixed price action, as investors should pay close attention to the small-caps, tech stocks, and the main cyclical sectors. Stay tuned!
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