We had a two-faced and very active week of trading on Wall Street, with new all-time highs in the S&P 500 and the Nasdaq in the first half of the week and a sudden and sharp selloff in the tech sector the final two days of the week. The memorable rally of the past few weeks, which was fueled by fewer and fewer stocks, led to a profit taking event, despite the mostly positive economic and COVID-related developments in the U.S. The pandemic continues to rage in several regions across the globe, but even considering the flare-up in the Midwest, the domestic situation continues to improve slowly. The pressure on the healthcare system is easing ahead of the crucial autumn months, which could bring another wave of outbreaks.
Most of the key economic releases leaned bullish yet again this week, and while the job market sent mixed signals again, the more forward-looking measures all confirmed that the recovery is still on track. The ISM manufacturing and non-manufacturing PMIs remained well above the 50 level, and the manufacturing measure even posted another surprise 15-month high. The weekly jobless claims report beat expectations across the board, with new claims and continuing claims both falling by much more-than-expected. While the ADP payrolls number missed by a wide margin, the government jobs report made bulls smile, as non-farm payrolls, hourly earnings, and the unemployment rate all providing bullish surprises.
The technical picture remains bullish, despite the steep late-week selloff, although the major indices and the Nasdaq, in particular, are still overbought in the wake of the historic rally, and a period of further volatility is likely ahead. The S&P 500, the Dow, and the Nasdaq all closed the week above their 50-day moving averages, and the indices are also miles above their 200-day moving averages. Small-caps once again lagged the broader market, apart from a few brief periods of strength, but despite its relative weakness, the Russell 2000 closed the week above both its moving averages again. The Volatility Index (VIX) continued its odd behavior despite the new all-time highs in the Nasdaq and the S&P 500, hitting a new seven-week high even before the late-week plunge and surging above 35 on Thursday for the first time since late-June before closing the week near 28.
Market internals were mixed this week, as even though the rally remained “narrow” amid the Nasdaq-led push to new record highs, the subsequent selloff was less pronounced in the key cyclical sectors. The Advance/Decline line is still lagging behind the major indices, and due to the sharp pullback, decliners outnumbered advancing issues by a 3-to-1 ratio on the NYSE, and by a 5-to-1 ratio on the Nasdaq. The average number of new 52-week highs increased on both exchanges, rising to 72 on the NYSE and 95 on the Nasdaq. The number of new lows also increased in the meantime, rising to 15 on the NYSE, and to 35 on the Nasdaq. The percentage of stocks above their 200-day moving average increased slightly, and the indicator remains well below its recent multi-month high, finishing near 56% on Friday.
Short interest spiked higher in the second half of the week as investors rushed to hedge their exposure, but the total amount of bearish beats remains well below the levels seen in recent months, and the most-shorted issues are still relatively stable. Carvana (CVNA) pulled back sharply, and since its short interest still stands at 32%, it could soon form a swing low and continue its rally. Iron Mountain (IRM) held up well amid the turmoil, and since the stock sports a days-to-cover (DTC) ratio of with a reading of 18, it could soon start the next leg higher in the recovery. Snap-On (SNA) managed to close the week in the green, after hitting a new three-month high earlier on, and as the stock has a DTC ratio of 13, its relative strength could be lasting.
While we are in for a relatively quiet holiday-shortened week of domestic economic releases, traders are unlikely to be bored. Trading activity generally spikes higher following the Labor Day weekend, and with the European Central Bank’s (ECB) crucial monetary meeting scheduled for Thursday, this year is unlikely to be different. The Fed will hold its highly-anticipated meeting one week after the ECB, and since a large part of Europe is facing deflationary pressures, both central banks will likely announce further easing steps. In the U.S., the Producer Price Index (PPI) and the Consumer Price Index (CPI) will be released on Thursday and Friday, respectively. Still, technicals and the COVID-related developments will likely have a more significant impact on stocks. Stay tuned!
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