Although a lot of tech issues pulled back on Friday, the Nasdaq was still the clear winner of the week, as investors loaded up on e-commerce-related and home-entertainment stocks. Most notably, Amazon (AMZN) and Netflix (NFLX) hit new all-time highs on Thursday, despite the nationwide lockdowns, as the pandemic likely peaked out globally and in the U.S. alike. The Trump Administration unveiled the plan to reopen the economy in the coming months, despite the debate between some of the governors and the Federal government. This also boosted investor confidence toward the end of the week. Despite the positive week, the global economy is likely in a deep recession, and the post-COVID world could still cause some negative short-term surprises to investors.
The week’s key economic releases were almost all weaker-than-expected, both domestically and internationally. The weekly number of new jobless claims was over 5 million again, and the total number of claims topped 22 million in only four weeks. Retail sales declined by 8.7% in the U.S, due to the strict lockdowns, while collapsing by over 15% (on a yearly basis) in China. The Philly Fed Index hit its lowest level on record, below -50, the Empire State Manufacturing Index also collapsed, and the CB Leading Index fell by 6.7% as well. The housing market sent mixed signals, as even though the NAHB Housing Market Index and housing starts missed expectations, the number of building permits was higher-than-expected.
The technical picture improved thanks to the Nasdaq’s relative strength, but the short-term indicators are still mixed, at best, despite the strong rally from March lows. The S&P 500 and the Dow closed the week near their declining 50-day averages, while the Nasdaq managed to rally above its short-term moving average. The tech benchmark is now also above its 200-day moving average, but the Dow and the S&P 500 remain well below their long-term indicators. Small-caps had another bearish week, despite Friday’s bounce, as the Russell 2000 lagged behind the large-cap indices and finished well below both its moving averages. The Volatility Index (VIX) continued to drift lower throughout the week, dipping below its 50-day moving average in the process and finishing near 38 on Friday, its lowest level in over a month.
Market internals continued to show weakness due to the poor performance of small-caps, but Friday’s session gave a boost to the most reliable breadth measures. The Advance/Decline line continues to show a negative divergence compared to the major indices, even though advancing issues outnumbered decliners by a 4-to-1 ratio on the NYSE, and by a 6-to-1 ratio on the Nasdaq. The average number of new 52-week highs rose on both exchanges, ticking higher to 11 on the NYSE and 16 on the Nasdaq. The number of new lows declined in the meantime, falling to 12 on the NYSE and 28 on the Nasdaq. The percentage of stocks above their 200-day moving average jumped higher, but Friday’s closing level of 18% is still clearly weak.
Short interest declined significantly on Friday, as bears rushed to the exits due to the positive COVID-related news flow, but the total number of bearish bets remains high on Wall Street. Match Group (MTCH) had a very strong week, gaining almost 15%, and the stock’s sky-high short interest of 67% could mean that a short squeeze is already underway. While National Beverage (FIZZ) failed to gain ground this week, its technicals are still very strong, and its short interest is above 58%, so the stock could rally further in the coming weeks. Current GorillaPick, Hormel Foods (HRL), closed the week at a fresh all-time high, still showing relative strength, and the stock’s still very high days-to-cover (DTC) ratio of 13 could fuel the technical breakout.
Investors are in for a crucial week with regards to the pandemic, the global economy, and the fate of the rally in equities. Stocks remained stable this week, despite the economic weakness, but the rally will face another huge test, as we will get the global Manufacturing and Services PMI’s on Thursday. The weekly number of new jobless claims will also be out on Thursday, while the durable goods report is scheduled for Friday. Although the pandemic likely peaked globally, the improvements have been very slow in Europe. Bulls hope that next week we will see a larger drop in the number of new cases both in the Old Continent and the U.S., which could support the now slightly “overbought” major indices. Stay tuned!
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