State of the Stock Market Analysis for the Week Ending on February 23, 2020 (Hectic Week on Wall Street | State of the Stock Market 2-23-20All You Need Is Jobs

Even though the Nasdaq and the S&P 500 hit new all-time highs, traders still had a hectic and nervous week on Wall Street. The strength of the traditional safe-haven assets well describes the coronavirus-related uncertainty that has been weighing on investor sentiment globally. It is rare that the 30-year Treasury and gold hit multi-month and multi-year highs, respectively, during such a rally in equities, but that is exactly what happened this week. Stocks also endured a steep late-week dip, and a majority of stocks finished the week in the red, amid the spike in volatility, the continued relative weakness in the Dow, and the almost three-year high in the dollar index.

The key economic releases almost all provided bullish surprises this week, apart from Friday’s Markit PMIs, adding to the upward pressure on the dollar and hinting about yet another strong quarter in the U.S. economy. The Empire State Manufacturing Index and the Philly Fed Index both beat the consensus estimates by wide margins, as the latter measure especially surprised analysts with its second-largest monthly increase on record. Building permits, housing starts, and the Producer Price Index (PPI) showed increased economic activity as well, while the CB Leading Index confirmed the improving outlook. The global situation, on the other hand, is mixed, at best, with the coronavirus outbreak already affecting the largest Asian and European economies.

The holiday-shortened week has not changed the bullish technical picture, and the key trend indicators continue to point higher, even though the major indices finished the week on a bearish note. The S&P 500, the Nasdaq, and the Dow all remain above their rising 200-day moving averages, and the benchmarks also closed the week above their steeply rising 50-day moving averages. Small-caps had their second encouraging week in a row, performing in-line with the broader market, and while the Russell 2000 is still below its all-time high from 2018, it remains above both its moving averages. The Volatility Index (VIX) hit a three-week high above the 18 level on Friday amid the increase in global coronavirus cases, and the fear gauge finished the week above both its moving averages.

Market internals remained stable despite the volatile price action, and even though some of the most reliable breadth measures are still weak, they still do not indicate an imminent correction. The Advance/Decline line hit another new bull market high thanks to small-caps this week, even as decliners outnumbered advancing issues by a 4-to-3 ratio on the NYSE, and by a 3-to-2 ratio on the Nasdaq. The average number of new 52-week highs was stable on both exchanges, ticking higher to 148 on the NYSE and 122 on the Nasdaq. The number of new lows increased again, rising to 81 on the NYSE and 72 on the Nasdaq. The percentage of stocks above their 200-day moving average declined in the second half of the week, finishing near the still formidable 64.5% level.

Short interest inched lower on Wall Street, and the most-shorted issues showed relative strength yet again, despite the continued worries regarding the global economy. MiMedx Group (MDXG) attempted a breakout on Friday, in the face of the pullback in the major indices. With its short interest of 62%, it makes another rally likely following almost three months of consolidation. Sea Limited (SE) had another blowout week, despite Friday’s dip, and the stock’s short interest of 44% still looks very dangerous for bears. Digital Realty Trust (DLR) hit a new all-time high this week, on the heels of its quarterly report, and the stock’s very high days-to-cover (DTC) ratio of 16 could mean that a short squeeze is ahead.

One of the most important questions in the coming week will be how the key safe-haven assets, such as gold, Treasuries, and the dollar will react to the coronavirus-related developments. The dollar’s unprecedented rally,in which the Dollar Index (DXY) has risen in 13 out of the last 15 sessions, gave a lot of analysts cold feet, but, for now, it hasn’t affected domestic stocks too much. Next week, we will have another batch of crucial economic releases, which could also make waves in the stock, currency, and bond markets alike. The CB Consumer Confidence number will be released on Tuesday, the durable goods report and the preliminary GDP print will be out on Thursday, while the week will end with the Core PCE Price Index and personal spending. Stay tuned!

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