Financial markets had another historic week globally, and the U.S. stock market was not an exception. It would be very hard to mention all the records that have been broken, but to name a few, the Dow had its worst day since 1987 on Monday, the energy sector hit its lowest level since 2003 as the price of oil collapsed, and the weekly volume on the NYSE hit an all-time high. The COVID-19 virus paralyzed entire countries in Europe, while quickly spreading on the East Coast as well, and the pandemic led to panic across credit and currency markets, propelling the dollar to an all-time high against a long list of currencies. The unprecedented response – over $5 trillion in liquidity injections, asset purchases, and fiscal stimulus from global central banks and governments -slowed down the freefall in risk assets, but the uncertainty regarding the economic impact of the pandemic remains very high.
The key economic releases have started to reflect the impact of the pandemic with a lot of forward-looking measures missing even the most pessimistic expectations. The outlook for the manufacturing sector deteriorated the most, with the Philly Fed Index suffering one of its worst monthly losses ever, hitting an eight-year-low, and with the Empire State Manufacturing Index also plunging below zero. The retail sales report was also disappointed, just as the number of building permits, but the huge jump in the number of new jobless claims was probably the biggest negative surprise for investors. The global picture was not pretty either, as some of the “soft” sentiment measures crashed to record lows in Europe amid the nationwide lockdowns.
The technical picture remains clearly bearish across the board with all of the key trend indicators flashing red in the wake of the crash, but should the uncertainty regarding the likely timeline of the pandemic decline, we could see a quick recovery in stocks. The S&P 500, the Nasdaq, and the Dow are now all well below their declining 50-day averages, and the benchmarks are also all below their 200-day moving averages. Small-caps remained relatively weak until Thursday, and despite the strong bounce in the Russell 2000 on Thursday, the index closed the week below both its short-and long-term moving averages, near its lowest level since 2016. The Volatility Index (VIX) got close to its all-time high this week, briefly topping 85, its highest level since 2008, and the “gauge” finished the week near the still extremely high 70 level.
Market internals deteriorated further due to the extremely bearish days, but there were notable positive divergences in some of the key breadth measures, which could hint at a possible short-term bottom. The Advance/Decline line continued to plunge, as decliners outnumbered advancing issues by a 25-to-1 ratio on the NYSE, and by a 23-to-1 ratio on the Nasdaq. The average number of new 52-week highs remained close to zero on both exchanges, edging higher to 6 on the NYSE and 5 on the Nasdaq. The number of new lows decreased slightly meantime, falling to 830 on the NYSE and 890 on the Nasdaq. The percentage of stocks above their 200-day moving average remained very low all week, hitting another multi-year low near 5%, and the measure closed the week near the extremely low 6% level.
Short interest increased substantially yet again, and the most-shorted issues started to lag the broader market due to the increasing solvency-related fears. Sea Ltd. (SE) finished the crazy week lower, it remains relatively strong compared to its peers, and its short interest is still at 44%, so it could be ready for a strong rally. Hormel Foods (HRL) hit a new all-time high thanks to the pent up demand for its products, and the stock’s very high days-to-cover (DTC) ratio of 15 suggests that more pain is ahead for bears. C.H. Robinson (CHRW) also found footing this week, despite the selling pressure, and its DTC ratio of 11 could support the stock in the coming weeks as well.
We will have a relatively calm week in terms of economic releases, but stocks are unlikely to settle down since the COVID-19 crisis is expected to deepen before improving in Europe and the U.S. alike. The Markit manufacturing and Services PMI’s are scheduled for Tuesday, together with new home sales and the Richmond Manufacturing Index. The Housing Price Index and the durable goods report will come out on Wednesday, while the final GDP print and the Core PCE Price Index will be out on Thursday and Friday, respectively. Apart from the stock market, investors will closely watch the developments in credit and currency markets, as this week’s moves suggest that the financial system is under a lot of stress, and global central banks might need to do even more to normalize market conditions. Stay tuned!
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