The holiday-shortened week started in a bullish fashion, as the promising U.S. COVID numbers, and the announcement of a substantial European stimulus plan lifted risk assets globally. The major indices all hit new recovery highs, even though the tension between the U.S. and China continued to increase. The diplomatic skirmish remained in focus toward the end of the week, and following the passage of the new Chinese national security law for Hong Kong, President Trump announced sanctions targeted at the Asian giant on Friday. The possible collapse of the “phase one” trade deal between the two countries poses a risk to the global economic recovery, especially since the exact damage of the virus is still unknown. Besides the U.S., the reopening push seems to be a success in Europe too, but the increasing number of South Korean cases is casting a shadow on the process.
We got a mixed bag in terms of economic releases this week, but on a positive note, several forward-looking indicators provided bullish surprises, and the post-lockdown rebound is expected to accelerate in the coming weeks. The housing market was in focus throughout the week, as existing home sales, building permits, and the NAHB Housing Market Index all beat the consensus estimates. Only the number of housing starts disappointed investors. The Philly Fed Index and the weekly number of new jobless claims both missed expectations and while the Markit manufacturing and services PMIs and the CB Leading Index were all bullish, Treasury yields still finished lower due to geopolitical tension.
The technical picture remains mixed on Wall Street. Even though the tech sector and the Nasdaq continues to be extremely strong from a global standpoint, the Dow and the S&P 500 remain stuck in a relatively narrow range, failing to make progress for weeks. The S&P 500, the Dow, and the Nasdaq all closed the week above their declining 50-day moving averages, but apart from the tech benchmark, the indices are still trading below their 200-day moving averages. Small-caps showed encouraging strength this week, which could mean that we will finally see a broader-based rally thanks to the global reopening push, even though the Russell 2000 is still well below its 200-day moving average. While the Volatility Index (VIX) drifted lower this week, it remained above its recent multi-month low, showing a bearish divergence for the first time since the March lows, which could be an early warning sign for bulls.
Market internals modestly improved following weeks of deterioration, and thanks to the Russell’s relative strength, the most reliable breadth indicators all ticked higher. The Advance/Decline ratio trended higher all week long, as advancing issues outnumbered decliners by a 4-to-1 ratio on the NYSE, and by a 3-to-1 ratio on the Nasdaq. The average number of new 52-week highs increased on both exchanges, jumping to 25 on the NYSE and 68 on the Nasdaq. The number of new lows declined substantially in the meantime, falling to 5 on the NYSE and 7 on the Nasdaq. The percentage of stocks above their 200-day moving average registered the most impressive improvement, surging higher to 30% and finishing the week near 27%, well above last Friday’s reading.
Short interest declined this week on both exchanges, as the most-shorted issues and small-caps performed very well, but the still large amount of bearish bets means that the “Wall of Worry” is clearly in place. National beverages (FIZZ) hit an almost six-month high this week, and since its short interest still stands at 55%, the stock could continue to trend higher. iRobot also continued to show strength in the choppy environment, and since it also sports a high short interest of 43%, the company could remain among the leaders of the recovery. CarMax (KMX) has been edging higher on the list with the highest days-to-cover (DTC) ratios, reaching a reading of 8 this week, and the stock is still trading in a strong bullish trend, which has all the chances to continue in the coming weeks.
The month will end with a holiday-shortened week, but there will be plenty of key economic releases, with a focus on manufacturing and the consumer economy. The CB consumer confidence number will come out on Tuesday, together with new home sales, the Richmond Manufacturing Index is scheduled for Wednesday. The durable goods report and the second reading of the first-quarter GDP will highlight Thursday’s session, and the week will end with the Chicago PMI, personal spending, and the Core PCE Price Index. With the escalating geopolitical tension, day-to-day volatility could increase next week. Barring any significant secondary outbreak in Europe, Asia, or the U.S., bulls will likely remain in the driver’s seat. Stay tuned!
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