After just one week, October has already lived up to its reputation of being the most volatile month of the year, as the deterioration in the key sectors of the economy caused turmoil across asset classes. The key benchmarks hit their lowest levels since late-August on Wednesday, as Treasury yields approached their all-time lows. In spite of the volatile dip, which was also fueled by the uncertainty concerning next week’s crucial trade talks with China, stocks closed the week on a positive note, as rate cut odds soared. Financials, industrials, and materials were hit the hardest due to the fears of a global recession, while utilities continued to shine, and consumer goods, services, and the healthcare sector all showed resilience as well.
The ISM manufacturing and non-manufacturing PMIs made the biggest waves this week, in terms of economic releases, and both measures missed expectations by wide margins. The manufacturing PMI signaled contraction for the second month in a row, while the services indicator was the lowest in more than three years. The government jobs report proved that the labor market remains in good shape because even though non-farm payrolls were slightly lower-than-expected, the unemployment rate came in at 3.5%, the lowest in 50 years. That said, wage growth stalled in September, and since the global economic trends are still worryingly weak, the Fed may be forced to continue its easing cycle at the end of the month.
Short-term technicals deteriorated in the first half of the week, with the major indices all entering a declining trend during that time-frame, but the bullish long-term trend is still not in danger at this point, and the late-week rally is a positive sign ahead of the crucial coming week. The S&P 500, the Nasdaq, and the Dow are still well above their rising 200-day moving averages, but the benchmarks finished the week right at their declining 50-day moving averages. Small-caps continued to struggle, and the declining Treasury yields put even more pressure on the Russell 2000, pushing the index well below both its 50 and 200-day moving averages. The Volatility Index (VIX) spiked above the 21 level amid the turmoil on Wall Street, but it finished just above last week’s close, near the 17 level thanks to the broad rebound.
The relative weakness in small-caps continued to weigh on market internals this week, although the last couple of days saw an improvement in the most reliable measures. The advance/decline line hit its lowest level in over a month due to the deep mid-week sell-off and decliners outnumbered advancing issues by a 4-to-3 ratio on the NYSE, and by a 3-to-2 ratio on the Nasdaq. The average number of new 52-week highs continued to decline on both exchanges, dropping to 32 on the NYSE and 14 on the Nasdaq. The number of new lows jumped higher in the meantime, rising to 50 on the NYSE and 132 on the Nasdaq. The percentage of stocks above their 200-day moving average fell yet again, as the measure plunged below the key 50% level, closing the week near 48%.
Short interest increased somewhat due to the jump in volatility, but the most-shorted issues performed very well during the late-week rally, even as small-caps lagged the broader market. National Beverage (FIZZ) hit a new four-month high on Friday, defying the market-wide trend, and since its short interest is still above 55%, the stock could be ready to push even higher. Conn’s (CONN) also gained ground on a weekly basis, as bulls stepped in to buy the dip again, and since the stock sports a short interest of 62%, it poses a huge risk for bears. Current GorillaPick, Sempra Energy (SRE), continues to hit new all-time highs almost every week, and despite a mid-week pullback, it finished just shy of its record high on Friday, fueled by its very high days-to-cover (DTC) ratio of 15.
The major indices closed the volatile week near key technical levels, and while investors will continue to keep technicals in mind, the trade negotiations in Washington will likely steal the show next week. With the economic pressures on the U.S. and China increasing by the day, a temporary truce would not be surprising. Analysts widely expect an interim agreement that would concern China’s agricultural purchases and the looming tariff increases, but a broader deal could be a huge boost to risk assets. As for economic releases, Tuesday’s Producer Price Index (PPI), Thursday’s Consumer Price Index (CPI), and Friday’s Michigan Consumer Sentiment number will be in focus, but the FOMC meeting minutes could also have a large impact on stocks on Wednesday. Stay tuned!
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