Relatively quiet and bullish trading continued this week on Wall Street, in the face of the U.S.-China tensions, the lack of a stimulus deal, the international headwinds, and the active global COVID “hot-spots.” Earnings season concluded with another batch of mostly positive reports, and, in total, 83% of the members of the S&P 500 beat estimates, which is the highest figure since 2008. The slow COVID-related improvements continued throughout the week in the U.S., as even though the number of infections crossed 5 million, the spreading of the virus continues to slow. The hardest-hit industries and the key cyclical sectors popped higher thanks to the positive domestic trends, and even though the market-leading tech sector had a rough start to the week, the major indices all ended the week in the green.
The key economic releases leaned bullish again, despite the stricter lockdown measures implemented in July, and while a lot of sectors are facing tough quarters, it’s no question that the outlook has been improving in recent weeks. The JOLTS job openings estimate, the Producer Price Index (PPI), the Consumer Price Index (CPI), the Michigan consumer sentiment number, and core retail sales all beat expectations in July, but industrial production missed slightly. The higher-frequency data, such as the bullish weekly jobless claims report and plunging crude oil inventories also point to positive trends, although the 15.5 million continuing jobless claims mean that the job market is still under pressure.
The technical picture further improved as the key cyclical sectors outperformed the Nasdaq, and since the Dow completed the “golden cross” technical pattern, the key trend indicators are all pointing higher. The S&P 500, the Dow, and the Nasdaq all closed the week above their 50-day moving averages, and the indices are also above their 200-day moving averages. Small-caps continued to impress, but even though the Russell 2000 inched closer to its all-time high and closed the week above both its moving averages, it remains weaker than its large-cap peers. The Volatility Index (VIX) continued to drift lower this week, with a brief spike up to 25 on Tuesday. It’s slowly but surely approaching the key 20 level as investors are starting to be more upbeat about the U.S. economic outlook.
While market internals continue to support the bullish case, a few key breadth measures deteriorated a bit in the latter half of the week, which is something bulls should keep an eye on in the coming weeks. The Advance/Decline line continues to march higher to new bull market highs, as advancing issues once again outnumbered decliners by a 5-to-1 ratio on the NYSE and by a 3-to-1 ratio on the Nasdaq. The average number of new 52-week highs declined on both exchanges, falling to 52 on the NYSE and 75 on the Nasdaq. The number of new lows remained very low, edging lower to 3 on the NYSE, and ticking higher to 6 on the Nasdaq. The percentage of stocks above their 200-day moving average hit yet another recovery high, getting close to the 60% for the first time since February, and closing the week near 58%.
The most-shorted issues remained relatively strong, especially in the first half of the week, as short interest dropped to new recovery lows on Wall Street thanks to the persistent rally. Match Group (MTCH) consolidated in a narrow range below its all-time high, and since its short interest still stands at 40%, shorts could soon face another tough period. While iRobot (IRBT) sold off after publishing its quarterly numbers in July, the stock seems to have found support near the $70 per share level. Since its short interest remains very high at 35%, iRobot might soon resume its recovery. Snap-On (SNA) got close to its recovery high this week, continuing its post-earnings rally, and should the stock manage to break out. Its very high days-to-cover (DTC) ratio of 12 could fuel a strong move toward its record high.
Several important forward-looking economic indicators will come out next week, such as the Philly Fed Index on Thursday and the Markit manufacturing and services PMIs on Friday, while the housing market and the Fed will be in the spotlight earlier on. The NAHB Housing Market Index will come out on Monday, building permits and housing starts will highlight Tuesday’s session, and the minutes from the Fed’s recent meeting will be released on Wednesday. Stocks still seem to be immune to bad news, which is a hallmark of strong bull markets, but according to the most reliable sentiment measures, investors are still wary of virus-related risk. This “wall-of-worry” could mean that the post-crash rally still has legs, and that the S&P 500 and even the Dow will soon hit new all-time highs. Stay tuned!
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