This week’s economic releases were clearly bullish, and some of the most important indicators simply blew away expectations. The CB consumer confidence number surged unexpectedly above 100, hitting a six-month high in the process, but the Chicago PMI, construction spending, pending home sales, Wards total vehicle sales, the ADP payrolls number, and continuing jobless claims were also much better-than-expected. Personal income beat the consensus estimates as well, despite the weak personal income number, but the very high Challenger job cuts estimate cooled the consumer-related optimism somewhat. The ISM manufacturing PMI, hourly earnings, and non-farm payrolls provided slight negative surprises, but the unemployment rate dropped to 7.9%, so the all-important government jobs report was mixed, at worst.
Short-term technicals improved notably this week, with the major indices all making progress despite the wild intraday and overnight swings. The Dow, the Nasdaq, and the S&P 500 are back right at their 50-day moving averages, and the large-cap benchmarks are still trading above their 200-day moving averages. Small-caps had a bullish week following last week’s disappointing showing, and the Russell 2000 got back up to its 50-day moving average towards the end of the week, which is great news for the broader market. The Volatility Index (VIX) settled down in the choppy environment, but despite the gains of the major indices, the “fear gauge” remains well above the 25 level and its 50-day moving average due to the economic and political uncertainty.
Market internals were boosted by the rally among small-caps toward the end of the week, and the most reliable breadth measures all showed considerable improvements compared to last week. The Advance/Decline line hit a three-week high after plunging to its lowest level since mid-July last week, as advancing issues outnumbered decliners by a 5-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 on both exchanges, rising to 35 on the NYSE, and 48 on the Nasdaq. The number of new lows crashed in the meantime, plunging to 12 on the NYSE and 23 on the Nasdaq. The percentage of stocks above their 200-day moving average bounced back hard thanks to the recovery, as the measure closed the week back above 50%, near the 54% level.
Short interest remained high, as hedging activity remains much more pronounced than during the last phase of the summer rally amid the still high level of uncertainty. Even though Bed Bath & Beyond’s (BBBY) business still faces headwinds, the stock hit a two-year high thanks to the company’s strong earnings, and the stock’s short interest of 61% could hint at a looming short squeeze. Leveraged solar play, SunPower (SPWR), also eked out a multi-year high this week, and since the stock sports a short interest of 41%, a lot of bears might be looking for the exits right now. Duke Energy (DUK) broke out of a multi-month consolidation pattern this week, and since it also has a very high days-to-cover (DTC) ratio of 10, the move could turn into a sustained rally.
We are in for a much quieter week in terms of economic releases and political events, but the active global COVID hot spots still pose a significant threat to risk assets. The ISM non-manufacturing PMI will be out on Monday, the JOLTS job openings estimate will highlight Tuesday’s session, the FOMC meeting minutes will be in focus on Wednesday, while “only” Thursday’s weekly jobless claim report has the potential to move the markets in the second half of the week. The President’s condition will definitely be in the spotlight too, but hopefully, he will only have to deal with the quarantine, not a serious illness. Stocks closed the third quarter with their first bearish month since March, but since the overbought momentum readings are now cleared, and economic recovery seems to be on track in the U.S., the fourth quarter could be another bullish one on Wall Street. Stay tuned!
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