Even though a slew of bullish earnings reports came out this week and, somewhat surprisingly, the European Union’s (EU) leaders finalized a historic stimulus package, trading activity remained relatively light on Wall Street. That is not to say that there were not any interesting developments in stocks, but compared to the new 20-month low in the dollar and the surge in the price of oil, equities were virtually unchanged. The coronavirus continued to spread quickly both in the U.S. and globally. While the negotiations regarding the next federal relief bill were in full swing all week, the economic uncertainty limited the upside, together with the cautious outlook of the corporate sector.
The majority of the key economic releases were bullish this week, with almost all sectors confirming the strong post-lockdown recovery. The high number of new jobless claims was probably the most worrisome sign, and since continuing claims also remain high, investors should keep an eye on the labor market. The Philly Fed Index, the Empire State Manufacturing Index, industrial production, retail sales, core retail sales, and the NAHB Housing Market Index were all much better-than-expected. The higher-than-expected Consumer Price Index (CPI) is a good sign for the consumer economy too. The NFIB Small Business Index was a tad above forecast as well, just as housing starts, but building permits and the Michigan consumer sentiment number missed expectations.
The technical picture improved little this week despite the pullback in the tech sector, as the Dow and the S&P 500 both hit five-week highs. The industrial average is now moving above key technical levels as well. The S&P 500, the Dow, and the Nasdaq all closed the week above their 50-day moving averages, the indices are also now clearly above their 200-day moving averages. Small-caps had a mixed week, even considering the fresh one-month high of the Russell 2000, but the index finished the week on a positive note, finally closing above both of its moving averages. The Volatility Index (VIX) got close to the 35 level during its early-week spike higher, but as stocks settled down, the “fear gauge” slipped and finished considerably lower, near the 25 level on Friday.
Market internals improved markedly in the latter half of the week, and despite the recent negative divergences, the most reliable breadth measures are still confirming the rally. The Advance/Decline line got close to its recovery high, turned lower, as advancing issues outnumbered decliners by a 4-to-1 ratio on the NYSE, and by a 6-to-5 ratio on the Nasdaq. The average number of new 52-week highs increased on both exchanges was virtually unchanged on both exchanges, edging higher to 50 on the NYSE but falling to 68 on the Nasdaq. The number of new lows rose in the meantime, ticking higher to 7 on the NYSE and 13 on the Nasdaq. The percentage of stocks above their 200-day moving average increased significantly thanks to the rally in small-caps, and the indicator finally closed the week back well above the 40% level, near 46%.
Short interest declined sharply following a mid-week short squeeze on Wall Street, and the most-shorted issues outperformed the large-cap benchmarks on a weekly basis. Ligand Pharma (LGND) drifted higher this week despite the volatile trading conditions, and given the stock’s short interest of 56%, it could be ready to break out to a new one-year high. National Beverages (FIZZ) also continues to show technical signs of buying pressure, and its still sky-high short interest of 51% could fuel further gains in the coming months. C.H. Robinson (CHRW) hit a new nine-month high this week, erasing its June correction, and the stock’s days-to-cover (DTC) ratio of 8 means that shorts could be in for a rough period.
The economic calendar will be a lot less busy next week following this week’s data dump, but we will still get a few critical releases, especially toward the end of the week. Earnings season will continue in earnest next week, with the first big names from the all-important tech sector, such as Microsoft (MSFT), Intel (INTC), and Texas Instruments (TXN), and the likes of Verizon (VZ), AT&T (T), and Coca-Cola (KO) highlighting the earnings calendar. Apart from the Sun Belt, the COVID numbers from India and Brazil will likely remain in focus as those fragile emerging economies continue to be under immense pressure. That said, bulls remain in control of financial markets, and U.S. stocks are still among the strongest assets from a global perspective. Stay tuned!
The week was relatively light on key economic releases. The post-lockdown recovery seems to have hit at least a speed bump, with the weekly jobless claims report especially causing headaches for bulls. The number of initial claims unexpectedly increased to 1.41 million, and continuing claims are still stubbornly high as well ahead of the expiration of the $600 per week extra benefits. The Housing Price Index (HPI), existing-home sales, and the Markit manufacturing and services PMIs were all below expected, but new home sales blew away expectations. And since the other housing market measures also recovered following the lockdown, this sector could be one of the engines of growth in the coming quarters.
The technical picture hasn’t changed much this week in the relatively quiet environment. Although the most reliable trend indicators all remain in bullish territory, and more and more stocks are joining the rally, the positive momentum has been weak lately. 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 had an encouraging week, as the Russell 2000 remained stable even during Thursday’s selloff, and the index closed above both of its moving averages for the second week in a row. The Volatility Index (VIX) finally managed to close below its 200-day moving average for the first time since February, and despite Thursday’s spike, it finished the week flat near the 26 level.
Market internals continued to improve thanks to the stability of small-caps, and despite Thursday’s pullback, all of the key breadth measures remain consistent with a bull market. The Advance/Decline line hit a new recovery high this week, showing a positive divergence compared to the major indices, as advancing issues outnumbered decliners by a 3-to-1 ratio on the NYSE, and by a 2-to-1 ratio on the Nasdaq. The average number of new 52-week highs increased again on both exchanges, jumping to 83 on the NYSE and 94 on the Nasdaq. The number of new lows declined in the meantime, edging lower to 3 on the NYSE and 7 on the Nasdaq. The percentage of stocks above their 200-day moving average continued to increase, confirming the broadening of the rally, and closing the week near 48%.
Short interest declined yet again on Wall Street, and the most-shorted issues performed very well compared to the large-cap benchmarks, thanks to the EU-deal and the prospect of another U.S. relief bill. Carvana (CVNA) continues to shine, hitting another new record high this week, and the stock’s short interest of 47% could fuel the rally in the coming months. While National Beverages (FIZZ) continued to consolidate near its recovery high, it remains a prime candidate for a technical breakout, thanks, in part, to its short interest of 51%. Snap-On (SNA) also looks ready to conclude its pullback and target its all-time high, and since its days-to-cover (DTC) ratio ticked higher to 12, shorts could soon start to feel the heat.
The month will end with a busy week of economic releases, with Fed’s monetary meeting also thrown into the mix on Wednesday. The week will start with the durable goods report on Monday, the CB consumer confidence number will be out on Tuesday, while pending home sales will be released ahead of the Fed’s decision on Wednesday. The first reading of the second-quarter GDP will highlight Thursday’s session, and Chicago PMI, personal spending, and the Core PCE Price Index will come out on Friday. The next coronavirus relief package will likely be unveiled sometime during the week as well, and we hope that the spread of the virus will finally slow down, as the pressure on the global economy is increasing. Stay tuned!
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