State of the Stock Market Analysis for the Week Ending on May 10, 2020 (Bulls Stage Impressive Comeback | State of the Stock Market 5-10-20All You Need Is Jobs

While we saw a scary risk-off shift toward the end of last week, bulls staged an impressive comeback, with the Nasdaq and mega-cap tech stocks, in particular, showing strength yet again. The global reopening efforts gained speed during the week. Since the hardest-hit countries in Asia and Europe managed to avoid major secondary outbreaks, investors remain upbeat regarding the speed of the upcoming recovery. The bond market still made history this week, as it started to predict negative interest rates in the U.S. for the first time ever. The action defies the words of Fed Chair Jerome Powell and several other central bankers, who have been vocal against pushing the Fed’s benchmark rate below zero.

The key economic releases were mixed this week following several weeks of mostly bearish surprises, but the uncertainty surrounding the economic impact of the pandemic remains high. The ISM non-manufacturing PMI came in well above forecasts, similarly to the manufacturing measure, which could be hinting at a quicker-than-expected recovery, at least in the U.S. The ADP payrolls number, the weekly number of new jobless claims and the Challenger job cuts estimate all confirmed the immense pressure on the labor market, but the government jobs report provided some hope to bulls. Non-farm payrolls declined by 20.5 million, the biggest drop on record, while the unemployment rate surged higher to 14.7%, but hourly earnings rose by more-than-expected, and the structure of the job losses makes a quick recovery possible.

As the major indices traded in relatively narrow ranges this week, the mixed technical picture remains unchanged, with the Nasdaq still being the strongest among the large-cap benchmarks. The S&P 500, the Dow, and the Nasdaq all closed the week above their declining 50-day moving averages, but apart from the tech benchmark, the indices are still trading below their 200-day moving averages. Small-caps had a mixed week, but even though the Russell 2000 had periods of relative strength. It continues to lag its large-cap peers from a technical perspective, despite closing the week above its 50-day moving average. The Volatility Index (VIX) drifted lower throughout the week, giving back all of last week’s surge, which is a positive sign for bulls, as market conditions continue to normalize.

Market internals continue to paint a more bearish picture of the stock market than the large-cap indices due to the persistent relative weakness of small-caps. The Advance/Decline line remains below its recovery high from two weeks ago, even though advancing issues outnumbered decliners by a 3-to-1 ratio on the NYSE, and by a 4-to-1 ratio on the Nasdaq this week. The average number of new 52-week highs rose on both exchanges, edging higher to 20 on the NYSE and 41 on the Nasdaq. The number of new lows also increased, ticking higher to 10 on the NYSE and 14 on the Nasdaq. The percentage of stocks above their 200-day moving average finally crossed 20%. Providing bulls something to cheer about, and the measure finished the week near 22%, its highest level since the crash.

Short interest was little changed in the choppy environment, and the most-shorted issues performed in-line with the large-cap indices on Wall Street. Match Group (MTCH) got close to its all-time high thanks to its bullish earnings reports, and with the stock’s short interest standing at 66%, a technical breakout would not be surprising in the coming weeks. iRobot (IRBT) also added to its recent gains, hitting an eight-month high in the process, and since its short interest edged close to 50%, a battle is brewing between bulls and bears. Rollins (ROL) erased all of its COVID-related losses this week, and given its days-to-cover (DTC) ratio of 10, it could be ready to tackle its all-time high from 2019, as soon as this month.

Next week will be relatively light on economic releases, but we will still get a few key inflation- and consumer-related indicators that might make waves in financial markets. Mortgage delinquencies will be closely watched on Monday, the Consumer Price Index (CPI) and the Producer Price Index (PPI) will be released on Tuesday and Wednesday respectively. The weekly number of new jobless claims will highlight Thursday’s session, and the week will end with the retail sales report and the Michigan consumer sentiment number. Consumer-related stocks outside of the most-affected industries held up well in the past few weeks with the help of the unprecedented stimulus packages. However, analysts agree that the long-term economic outlook is highly dependent on how permanent consumption-patterns will change in the U.S. and globally. Stay tuned!
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