Short-term traders are likely thankful that this week is behind them, as the vicious intraday swings made for a rough trading environment even for the most experienced participants. While the major indices routinely erased their morning losses in the past couple of weeks, thanks to bulls’ eagerness to buy-the-dips, Thursday’s spike in Treasury yields was too much to handle for investors. Even the relatively strong cyclical sectors got into trouble on the last two days of the week, and as the number of COVID infections leveled out following weeks of promising improvements, the most virus-sensitive issues pulled back too. That said, there were positive catalysts as well, such as the accelerating vaccine push, and since Congress is getting close to passing the next round of stimulus, bulls will likely remain in the driver’s seat on Wall Street.
The week’s key economic releases leaned bullish again, fueling the rally in Treasury yields, and even the housing and job markets, which have been facing headwinds recently managed to impress. The weekly number of new jobless claims plunged back below 750,000 following two weeks of negative surprises and durable goods beat expectations by a wide margin. The CB consumer confidence number, personal income, and the Core PCE Price Index also provided positive surprises, similar to new home sales and the Case-Shiller Housing Price Index. On a negative note, pending home sales declined unexpectedly, the Chicago PMI and personal spending were a tad lower-than-expected, and crude oil inventories also increased for the first time in five weeks, but the relatively strong energy sector shrugged off the slightly bearish data point.
This week’s wild intraday swings caused turmoil on Wall Street from a short-term technical perspective, especially in the Nasdaq’s case, but the major indices remain in bullish long-term trends, although the current pullback could still continue. The S&P 500 and the Dow are still above their 50-day moving averages, but the Nasdaq closed the week below its short-term indicator. However, the benchmarks are still well above their rising 200-day moving averages. While small-caps hit a fresh three-week low during the pullback and finished the week lower together with the broader market, the Russell 2000 is still clearly above both its moving averages. The Volatility Index (VIX) had another very active week, spiking higher and dropping sharply several times, before finishing above both its moving averages, near the 28 level.
Even though market internals have been impacted by this week’s broad pullback, the key breadth measures all continue to confirm the bull market. The Advance-Decline line dropped for the second day in a row, as decliners outnumbered advancing issues by a 3-to-1 ratio on the NYSE and a 4-to-1 ratio on the Nasdaq. The average number of new 52-week highs increased on both exchanges, rising to 223 on the NYSE and 227 on the Nasdaq. The number of new lows edged higher in the meantime, rising to two on the NYSE and five on the Nasdaq. The percentage of stocks above their 200-day moving average is now well below its recent decade-long highs, but the measure stayed above 80%, closing the week near the 81% level.
Short interest has been creeping higher since the first round of the Reddit-fueled squeeze, but short-sellers are still wounded, and the total amount of bearish bets remains very low from a historical perspective. ViacomCBS (VIAC) continued its relentless rally in the past couple of weeks, getting ever closer to its all-time high, and while its short interest is now at only 18%, there likely are still plenty of trapped bears to fuel the advance. Oil & gas company Continental Resources (CLR) also sports a high short interest of 24%, and the stock clearly broke out above its January highs this week, which could mean that it’s ready to continue its recovery. Analog Devices (ADI) continues to trade in a strong bullish trend, just below its record high, and with its days-to-cover (DTC) ratio at 12, the chipmaker could continue to push higher.
March will kick off with a huge week of economic releases so the Treasury market and, in turn, stocks could be in for another roller-coaster ride. The ISM manufacturing PMI will be out on Monday, the services PMI, the ADP payrolls number, and the Fed’s Beige Book is scheduled for Wednesday, the Challenger job cuts estimate will highlight Thursday’s session, and the week will end with the government jobs report. The Democrats’ push to pass the President’s stimulus package will also be in the spotlight, while OPEC’s scheduled meeting could have a major impact on the frothy energy sector. Stay tuned!
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