Price action remained choppy but bullish this week on Wall Street, but the rally became a tad weaker “under-the-hood” due to lingering economic uncertainty. The Nasdaq and the S&P 500 both hit new all-time highs in the face of the pronounced relative weakness of the Dow, and several key cyclical sectors and investors also shrugged off the troubling European COVID trends. The ongoing stimulus talks and the improving U.S. numbers dominated headlines, with the high-flying tech companies such as Apple (AAPL) and Tesla (TSLA) also turning heads. The Democratic convention didn’t provide big surprises, as Joe Biden officially became the presidential nominee of the party, going into the last ten weeks of the campaign with sizable lead (according to the latest polls).
The week’s key economic releases leaned bullish once again, but some of the forward-looking measures pointed to a drop in the speed of the recovery. The manufacturing sector cooled down according to the Empire State Manufacturing Index and the Philly Fed Index, and the surprising increase in the number of new jobless claims also weighed on investor sentiment. The number of continuing claims dropped below 15 million, but that number still suggests that further government measures are needed to stabilize the job market. The CB Leading Index, housing starts, building permits, existing home sales the NAHB Housing Market Index, and the Markit manufacturing and services PMIs all beat expectations, but European woes still put pressure on growth-sensitive stocks.
The technical picture continues to be bullish at the level of the major indices, even though the Dow’s weakness, together with the troubles in the financial sector, is still casting a shadow on the rally. 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 clearly lagged the broader market this week, erasing some of their recent gains, but the Russell 2000 still closed the week above both its moving averages. The Volatility Index (VIX) ticked higher following the Fed’s meeting minutes, and despite its multi-month bearish trend, the “fear-gauge” is still stubbornly holding above the widely-watched 20 level.
Market internals deteriorated somewhat due to the weakness of small-caps and cyclical issues, but the most reliable breadth measures are still confirming the bull market. The Advance/Decline line turned lower following several bullish weeks, as advancing issues once again outnumbered decliners by a 5-to-4 ratio on the NYSE, and by a 6-to-5 ratio on the Nasdaq. The average number of new 52-week highs declined on both exchanges, falling to 43 on the NYSE and 61 on the Nasdaq. The number of new lows edged higher in the meantime, increasing to 6 on the NYSE, and to 13 on the Nasdaq. The percentage of stocks above their 200-day moving average also dropped from last week’s multi-month high, but the measure still closed the week well above 50%, near 55%.
Short interest inched slightly higher following several weeks of decreases and the most-shorted issues failed to extend their recent gains despite the Nasdaq’s and the S&P 500’s strength. National Beverages (FIZZ) had a great week, outperforming the broader market yet again, and the stock could be ready to break out of its consolidation pattern, fueled by its short interest of 50%. Carvana (CVNA) also edged higher in the quiet environment, getting closer to its recent all-time high, and the stock still sports a short interest of 40%, adding to the bullish catalysts. C.H. Robinsons is also closing in on its record high, defending its post-earnings gains, and since its days-to-cover (DTC) ratio still stands at 10, bears could be in for a rough ride.
We are in for a very busy week of economic releases, with the Fed also taking center stage. The CB consumer confidence number will be out on Tuesday, the durable goods report will highlight Wednesday’s session, pending home sales will come out on Thursday, while the week will end with the Core PCE Price Index, personal spending, and the Chicago PMI. The Fed’s annual Jackson Hole Symposium will kick off on Thursday, and investors will be eager to hear what the Central Bank has in store in the case of a slower-than-expected recovery. From a technical standpoint, the key breadth measures should be closely monitored by investors in the wake of this week’s divergent price action. Stay tuned!
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