Although, under-the-hood, a lot of things changed on Wall Street, as we saw a clear shift toward the traditional cyclical sectors, the bullish trend continued in earnest at the level of the major indices. The Nasdaq 100 index became the first large-cap benchmark in the world to erase the COIVD bear market, despite the tech sector’s slight weakness this week. Since the key European markets also hit new multi-month highs and the dollar pulled back, the risk rally is clearly broadening as economic uncertainty is finally dissipating. The European Central Bank (ECB) followed the Fed’s lead and expanded its asset purchase program by $675 billion, and although U.S. protests and the U.S.-China tensions were weighing on risk assets at the beginning of the week, investors remained upbeat globally.
The key economic releases leaned bullish this week, and the swift recovery in the labor market made bulls smile bigtime. The ADP payrolls number and the official non-farm payrolls number were both much better-than-expected, with the latter coming in a staggering 10 million above the consensus estimate, at 2.5 million. The unemployment rate ticked lower to 13.3%, well below the expected 19.4%, and while hourly earnings declined unexpectedly, the reopening push seems to have already brought a lot of jobs back. On the other hand, both the number of new and continuing jobless claims missed expectations, just as the ISM manufacturing PMI, but the bullish non-manufacturing PMI and construction spending both point to a quick post-lockdown recovery.
The technical picture continued to improve across the board, and even though some of the hardest-hit sectors are still stuck in bearish trends, the major indices almost completed their bullish reversals. The S&P 500, the Dow, and the Nasdaq all closed the week above their 50-day moving averages, and now the indices are also above their 200-day moving averages. Small-caps had another bullish week, the third one in a row, and the Russell 2000 closed the week above its long-term moving average for the first time since February. The Volatility Index (VIX) continues to show a negative divergence, barely dipping below its May low, as the “fear gauge” closed the week right at its 200-day moving average, near the 24.5 level.
Market internals continued to quickly heal thanks to the broad rally, and now, almost all of the key breadth indicators are back in bull market territory. The Advance/Decline line got close to its bull market high from February, with the help of small-caps, as advancing issues outnumbered decliners by a 12-to-1 ratio on the NYSE, and by a 9-to-1 ratio on the Nasdaq. The average number of new 52-week highs ticked higher on both exchanges, rising to 35 on the NYSE and 74 on the Nasdaq. The number of new lows declined in the meantime, falling to 1 on the NYSE and 4 on the Nasdaq. The percentage of stocks above their 200-day moving average rose sharply again following a less bullish week, and it reached another recovery high closing the week just above the 45% level.
Short interest fell sharply for the third straight week, as bears fled small-caps in droves amid the continued short squeeze adding to the buying pressure on Wall Street. ANGI Homeservices (ANGI) had a terrific week, with the stock hitting its highest level in almost a year, and its short interest of 58% could fuel the next leg higher in the coming weeks. Eldorado Resorts (ERI) benefited from the rally in the hardest-hit industries, and the stock’s very high short interest of 39% could mean that it will continue its recovery. Iron Mountain (IRM) hit its highest level since mid-March this week, and since it’s near the top of the list of the stocks with the highest days-to-cover (DTC) ratios, with a reading of 15, the short squeeze might still be in its early days.
The Fed’s rate decision and monetary statement are usually crucial for financial markets, but given the recent unprecedented steps by the Central Bank, further monetary stimulus seems unlikely on Wednesday. That said, the Fed’s economic outlook could trigger wild moves in the bond market, and there will be plenty of key economic releases coming out also. The NFIB Small Business Index will be released on Tuesday, the Consumer Price Index (CPI) and the Producer Price Index (PPI) will be released on Wednesday and Thursday, respectively. The week will end with the Michigan consumer sentiment number. As the number of COVID infections continues to quickly increase globally, a deeper pullback in stocks would not be a huge surprise, but should the economic recovery remain on track, bulls will likely remain in the driving seat. Stay tuned!
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