The pandemic, which is still in full swing both in the U.S. and globally, the stimulus negotiations in Washington, and the slowing global recovery dominated financial markets this week, but domestic stocks held firmly despite the mixed catalysts. We had yet another hectic week of corporate earnings too, and the string of positive surprises continued. Market-leading tech giants blew away expectations, and several other consumer-related stocks also published encouraging numbers. The diplomatic skirmish between the U.S.-China remained at the back of investors’ minds. Tension eased somewhat, helping risk assets across the globe. European stocks and the dollar were the clear laggards of the week, while gold hit a new all-time high just above the historic $2,000 per ounce level thanks to its global safe-haven flows.
The key economic releases leaned bullish this week, following several weeks of deterioration. However, global headwinds remain strong, and the level of uncertainty concerning the pandemic is still very high. The first reading of the second-quarter GDP was slightly better-than-expected, but the annualized drop of 32.9% was still the largest on record. The manufacturing sector and the housing market showed stability in July, as durable goods orders, the Richmond Manufacturing Index, and the Chicago PMI all beat expectations, as did pending home sales. The consumer economy might have some bumps ahead, despite the favorable second-quarter corporate earnings, as the job market recovery seems to have stalled according to the weekly jobless claims report, and personal income also fell by more-than-expected.
Even though the technical picture remains bullish at the level of the major indices, the Dow’s relative weakness is more and more striking, and a lot of the key sectors, such as financials remain under pressure due to economic uncertainty. The S&P 500, the Dow, and the Nasdaq all closed the week above their 50-day moving averages, and the indices are also above their 200-day moving averages. Small-caps had another positive week, as the Russell 2000 held up relatively well during the late-week dip, and the benchmark closed the week above both its moving averages again. The Volatility Index (VIX) remained within last week’s range, despite Thursday’s brief surge higher, and it finished the week near 22, below its 200-day moving average.
Market internals continued to slowly improve for the third week in a row, despite the intraday selloffs, but due to the weakness in some of the key sectors, the most reliable breadth measures are still not as bullish as in the period before the start of the pandemic. The Advance/Decline line hit new a new recovery high again, 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 declined on both exchanges, falling to 65 on the NYSE and to 72 on the Nasdaq. The number of new lows increased in the meantime, edging higher to 6 on the NYSE and 15 on the Nasdaq. The percentage of stocks above their 200-day moving average also ticked higher, as more small-cap issues joined the rally, and the measure crossed the 50% for the first time since the crash in March.
The most-shorted issues performed well again thanks to the Fed’s dovish stance and the extension of the Central Bank’s lending programs, and short interest declined once again on Wall Street. National Beverage (FIZZ) broke out of its consolidation pattern, hitting a new 20-month high, and since its short interest increased to 52%, bears could soon be under a lot of pressure. Match Group (MTCH) also popped higher this week, ahead of the firm’s earnings report, which could easily become the trigger for another short squeeze given the stock’s short interest of 40%. Current GorillaPick, Hormel Foods (HRL), hit a new all-time closing high this week, and since its days-to-cover (DTC) ratio stands at 12, the stock could soon surpass its intraday high from March as well.
August will kick off with another busy week of economic releases, with several crucial “soft” forward-looking measures and job market indicators highlighting the week. The ISM manufacturing and non-manufacturing PMIs will be out on Monday and Wednesday respectively. The IBD/TIPP sentiment number will be released on Tuesday, while the ADP payrolls number, the weekly jobless claims report, and the government jobs report are scheduled for Wednesday, Thursday, and Friday. The next stimulus bill, the so-called HEALS act will likely take its final form as well next week, and a quick deal could mean that the consumer economy will not suffer a huge hit due to the expiration of the $600 per week extra unemployment benefit. Stay tuned!
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