Stocks started the week in a clearly bullish fashion, with the Nasdaq leading a strong Monday rally thanks to a classic short squeeze in the tech sector. The major indices suddenly got close to their recovery highs following last week’s broad-based push higher, but the strong international headwinds led to a three-day pullback on Wall Street. The continued surge in the number of new COVID cases in Europe and the slew of strict containment measures caused a global risk-off shift, but U.S. equities remained remarkably stable. The earnings season kicked off with a mixed bag of reports from the financial sector, but most cyclical issues and small-caps held up well thanks to the relative strength of the domestic economy.
The key economic releases leaned bullish once again, and the NFIB Small Business Index, retail sales, and the Philly Fed Index were all much better-than-expected. The latter measure hit its highest level since January, giving a huge boost to the industrial sector, despite the disappointing industrial production number. The Consumer Price Index (CPI) and the and core CPI each matched expectations, ticking higher by 0.2%, but the Producer Price Index (PPI) was well above forecast in September, easing deflationary fears. The weekly jobless claims report was mixed again, as new claims jumped to their highest level since late-August, but the number of continuing claims dropped by more than 1 million.
The technical picture remains bullish across the board, despite the mid-week dip, and while the strong international headwinds could cause trouble in the coming weeks, the major indices could soon be ready to test their all-time highs. The S&P 500, the Dow, and the Nasdaq remain above their 50-day moving averages, and the benchmarks are also well clear if their 200-day moving averages. While small-caps took a breather in the first half of the week, the Russell 2000 regained its relative strength for the last couple of sessions, as it finished well above both its moving averages and near its recovery high on Friday. The Volatility Index (VIX) had another eventful week, and while it briefly fell below its 50-day moving average, it returned to the range between its two moving averages amid the dip in stocks, and closed the week near the 27 level.
Market internals remained strong even during this week’s pullback, and thanks to the relative strength of small-caps, some of the key breadth indicators even improved. The Advance-Decline line drifted lower during the week after hitting a new bull market high on Monday, but advancing issues still outnumbered decliners by a 4-to-3 ratio on the NYSE and a 6-to-5 ratio on the Nasdaq. The average number of new 52-week highs declined slightly on both exchanges, falling to 75 on the NYSE and 100 on the Nasdaq. The number of new lows ticked higher in the meantime, increasing to 6 on the NYSE and 10 on the Nasdaq. The percentage of stocks above their 200-day moving average remained stable and finished the week at 63%, very close to last Friday’s closing value.
Short interest further declined thanks to Monday’s rally in the tech sector, and even though the total amount of bearish bets ticked higher during the pullback, the most-shorted issued showed stability throughout the week. Current GorillaPick, National Beverages (FIZZ), continued to churn higher for the second week in a row, and since the stock’s short interest is still close to 60%, a breakout to new recovery highs could be ahead. Carvana (CVNA) also sports a high short interest of 32%, and while the stock has been drifting sideways for almost three months, the consolidation could soon be over. Another current GorillaPick, Hormel Foods (HRL), spent the last couple of months in a correction as well, but the stock has been showing signs of life lately, and its days-to-cover (DTC) ratio of 17 could spell trouble for bears.
The coming week will be relatively low on key economic releases, but since the earnings season will continue and the global COVID situation remains tense, day-to-day volatility could remain high on Wall Street. Building permits and housing starts will be out on Tuesday, the Fed’s Beige Book will highlight Wednesday’s session, the jobless claims report and existing home sales will be released on Thursday, and the week will end with the Markit manufacturing and services PMIs. Consumer-related and tech stocks will dominate the earnings calendar, with the likes of Tesla (TSLA), Netflix (NFLX), Intel (INTC), Procter & Gamble (PG), Coca-Cola (KO), Verizon (VZ), and AT&T (T) reporting, but the healthcare sector could also see active trading. Stay tuned!
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