This week was quite the roller-coaster ride for stock investors, as even though there were a lot of bullish signals popping up, such as the relative strength of small caps and the rally in oil, the escalating U.S.-China tensions kept a lid on the major indices. The global reopening efforts continued in earnest, and now all of the U.S. states have started to ease their containment measures. While we still haven’t seen a major secondary outbreak in the U.S., Europe, or Asia, the Russian and Brazilian outbreaks lifted the number of new cases back above 100,000 globally. Despite that, the fact that Fed Chair Jerome Powell confirmed that the Fed has plenty of tools left to support the recovery boosted investor sentiment, especially as the European Union (EU) moved closer to a major stimulus package.
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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