On Monday, it seemed that this week could have been a turning point for stocks following one of the strongest rallies in Wall Street’s history. Stocks opened the week with steep losses following last week’s pullback, but instead of another wave of selling, bulls took control of the market again. While the COVID-19 related headlines were mixed at best, the promise of an effective treatment and the Fed’s plan to directly buy corporate bonds triggered a reversal. Equities settled down in the latter half of the week, and even the number of new infections surged higher globally. The U.S. situation deteriorated somewhat, but the recovery remains on track, and U.S. stocks are still the undoubted leaders of the global rally.
It has been hard to make sense of the key economic releases this week, as the indicators were all over the place following the historic changes that the lockdowns caused. Retail sales surged higher by 17.7%, the most in history, and even core sales jumped by 12.4% amid the reopening push. The Philly Fed Index blew away expectations as well, getting back into positive territory. On the other hand, building permits, housing starts, industrial production, and the weekly jobless claims report were all bearish. While the NAHB Housing Market Index was much better-than-expected, the real estate sector showed relative weakness in the wake of the disappointing reports, despite record-low mortgage rates.
The technical picture improved thanks to a strong bounce, and even though the key trend indicators are still mixed, the market-leading Nasdaq got very close to hitting another all-time high. The S&P 500, the Dow, and the Nasdaq all closed the week above their 50-day moving averages, and apart from the Dow, the indices are also above their 200-day moving averages. Small-caps had a two-faced week, as even though the Russell 2000 spearheaded the snapback rally, it lagged the broader market later on and closed the week below its 200-day moving average. The Volatility Index (VIX) closed the week in the red near the 35 level, after drifting lower along its 50-day moving average for several days. However, it remains well above its long-term average due to the lingering economic uncertainty.
Market internals confirmed the early-week bounce, and despite the broad weakness toward the end of the week, the key breadth indicators remain bullish. The Advance/Decline closely tracked the major indices this week, as advancing issues outnumbered decliners by a 5-to-1 ratio on the NYSE, and by an 8-to-1 ratio on the Nasdaq. The average number of new 52-week highs increased on both exchanges, rising to 24 on the NYSE and 68 on the Nasdaq. The number of new lows ticked lower in the meantime, falling to 1 on the NYSE and 4 on the Nasdaq. The percentage of stocks above their 200-day moving bounced back too, but failed to get close to its recent highs, finishing the week near 38%.
Short interest declined sharply following last week’s increase as the most-shorted issues roared back together with small-caps in the beginning of the week. National Beverages (FIZZ) hit its highest level since early 2019, outperforming the broader market, and since the stock’s short interest is still standing at 57%, a lot of bears might be in big trouble. While Tesla’s (TSLA) short interest is only about 11%, given the size of the company, it could still easily fuel another short squeeze, with the stock consolidating just below its all-time high. CarMax (KMX) also closed the week a tad shy of its record high, and given its days-to-cover (DTC) ratio of 8, the stock could continue higher following its epic post-crash recovery.
We will have a very busy week of economic releases, and the forward-looking global manufacturing and services PMIs could have an especially strong impact across asset classes on Tuesday. The durable goods report will also be closely watched on Thursday, while the week will end with core PCE Price Index and personal spending, which missed expectations by a wide margin last month. The fate of the European Union’s (EU) historic stimulus package will likely remain in focus too. Hopefully, the pandemics pressure will ease, and this week’s troubling trends will not continue. The key cyclical sectors saw the most volatility this week with financials, in particular, showing weakness, but the Nasdaq seems to be ready to lead the next leg higher in the rally. Stay tuned!
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