Even though last week ended in a decisively bullish mood and the Nasdaq’s new all-time high made headlines early on this week, stocks suffered a major blow on Thursday. The Fed’s gloomy economic outlook and the uptick in the number of COVID cases in the U.S. triggered the worst one-day selloff since mid-March on Wall Street, with the Dow shedding almost 2,000 points in one session. Following two bullish weeks, cyclical issues led the way lower again. Although political tension eased in the U.S., together with China-related woes, investors lost confidence regarding the global economy. The mixed global COVID situation has also been weighing on risk assets, as Latin America and parts of Asia continue to report worrisome numbers, amid the reopening push in Europe and the U.S.
The key economic releases deteriorated following last week’s bullish bonanza, and although we got a few positive indicators, the overall picture was less rosy. The JOLTS job openings estimate, the IBD/TIPP economic sentiment number, the Consumer Price Index (CPI), continuing jobless claims, and a slew of European measures missed expectations, and the speed of the recovery remains uncertain both in the U.S. and globally. However, the Producer Price Index (PPI), the NFIB Small Business Index, and the weekly number of new jobless claims were all stronger-than-expected.
The technical picture deteriorated somewhat due to Thursday’s broad selloff, but thanks to the historic post-crash rally, most of the key trend indicators are still bullish. The S&P 500, the Dow, and the Nasdaq all closed the week above their 50-day moving averages, and apart from the Dow, the indices are also above their 200-day moving averages. Small-caps were hit very hard this week, as the Russell 2000 clearly lagged its large-cap peers and closed the week below its long-term moving average again. The Volatility Index (VIX) surged above 40 on Thursday, jumping by almost 50% in one session, and finishing the week above its 50-day moving average, near 35.
Market internals were hit hard due to the weakness among small-caps and the selling spree in the key cyclical sectors, but the most reliable breadth measures continue to lean bullish. The Advance/Decline line dipped back below its high from February after breaking out last week, as decliners outnumbered advancing issues by a 7-to-1 ratio on the NYSE, and by a 5-to-1 ratio on the Nasdaq. The average number of new 52-week highs declined on both exchanges, falling to 16 on the NYSE and 42 on the Nasdaq. The number of new lows edged higher in the meantime, rising to 2 on the NYSE and 5 on the Nasdaq. The percentage of stocks above their 200-day moving average took a nosedive in the latter half of the week, falling below the 40% level again. The measure finished near 33% on Friday.
Short interest rose for the first time in over a month on Wall Street, and the most-shorted issues were under strong selling pressure toward the end of the week as volatility skyrocketed. Match Group (MTCH) pulled back together with the broader market, but the stock is still within striking distance of its all-time high, and its short interest of 71% makes another breakout likely. ANGI Homeservices (ANGI) also edged lower following its memorable comeback this week, but bulls might already be gearing up for the next leg higher, as the stock’s short interest is still standing a 57%. Brown-Forman (IRM) remained relatively stable amid the volatile selloff, holding on to most of its post-crash gains, and its high days-to-cover (DTC) ratio of 8 could mean that the exits will be crowded for bears when the stock resumes its rally.
Volatility could be the name of the game for stock investors next week, as this week’s pullback could continue, and the busy economic calendar will also support wild swings across asset classes. The Empire State Manufacturing Index will be out on Monday, while retail sales and industrial production will highlight Tuesday’s session. Building permits and housing starts are scheduled for Wednesday, while the Philly Fed Index will be released on Thursday. Fed Chair Jerome Powell will testify in Washington on Tuesday and Wednesday as well. Since the Bank of England will hold its monetary meeting on Thursday, Treasuries could have yet another volatile week, following the post-Fed plunge in yields. Stay tuned!
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