Stocks had another rough week, especially in the market-leading tech sector, as despite the strong rally attempts, sellers remained clearly in control of the market. The Nasdaq entered correction territory, falling by more than 10% compared to its recent all-time high, but some of the key cyclical sectors remained relatively stable, with consumer-focused companies holding up especially well. Besides the euphoric sentiment in the tech sector, the troubling global COVID developments, the Brexit chaos, and the lack of a U.S. stimulus deal all weighed on risk assets, but domestic stocks are still in a very strong position from a global perspective.
Traders said that Friday’s session gave hope to bulls that a short-term bottom is near and that the “rotation” into cyclical issues will continue. As one trader explained, “While bulls are clearly not out of the woods yet, as Russell 2000’s relative weakness is still a bad omen for stocks. However, the fact that industrial, financials, and energy-related issues all finished in the green is a positive sign for the coming weeks.”
The key economic releases continue to lean bullish, but this week, we had a few notable negative surprises. The IDB/TIPP sentiment number slightly missed the consensus estimate, crude oil inventories unexpectedly increased, but the weekly jobless claims report was the most concerning. Both the number of new and continuing claims were higher-than-expected, with the latter measure even increasing. However, the blowout JOLTS job openings estimate means that the job market recovery could continue despite this week’s setback. The higher-than-expected Producer Price Index (PPI), Consumer Price Index (CPI), and the drop in wholesale inventories all point at strong demand, which could boost domestic-focused stocks in the coming weeks and months.
The technical picture remains bullish, but the short-term correction has caused some damage in the Nasdaq, and the short-term selling pressure is still apparent on Wall Street. The S&P 500, the Dow closed the week above their 50-day moving averages, but the Nasdaq breached its key indicator, while the indices are all still above their 200-day moving averages. Small-caps performed roughly in line with the large-cap benchmarks this week, but the Russell 2000 remains very weak from a technical perspective, and it closed the week below its short-term moving average. The Volatility Index (VIX) retreated this week after hitting its highest level since mid-June last week, but it remains well above its late-summer range, and it closed the week near 27 thanks to its encouraging Friday drop.
Market internals deteriorated slightly this week, but the key breadth measures remained stable in the face of the correction. The Advance/Decline line hit a more than one-month low this week, as decliners outnumbered advancing issues 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 dropped sharply on both exchanges, falling to 22 on the NYSE and 31 on the Nasdaq. The number of new lows increased in the meantime, rising to 21 on the NYSE, and to 37 on the Nasdaq. The percentage of stocks above their 200-day moving average also hit a new one-month low, but the measure remained above 50% and closed the week near 52%.
Short interest increased for the second week in a row on Wall Street, but the most-shorted issues held up relatively well together with small-caps in the face of the volatile pullback in the tech sector. iRobot (IRBT) had a very strong week, hitting its highest level since mid-July, and since its short interest is still above 40%, it could test its recovery high this month. SmileDirectClub (SDC) hit an almost six-month high thanks to its second blowout week in a row, and its short interest of 36% could mean that the stock is a prime candidate for a full-blown short squeeze. C.H. Robinson (CHRW) got even closer to a long-term technical breakout, while its days-to-cover (DTC) ratio even crept higher to 11, so shorts might be in for a rough period.
The Fed’s monetary meeting on Wednesday will surely be the center of attention next week, but following the ECB’s rather hawkish message and the string of positive economic surprises, the Fed might disappoint a lot of investors and refrain from further easing steps. The highly-anticipated retail sales report will come out on Wednesday, while Thursday’s Philly Fed Index, and Friday’s Michigan consumer sentiment number could also help in turning the bearish tide on Wall Street. The worrisome European and Indian COVID numbers could mean that overseas stocks and crude oil will remain under pressure, but profit-taking in U.S. equities might soon be over. Stay tuned!
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