Even though Fed Chair Jerome Powell announced the Central Bank’s most important policy shift in years, and the campaign entered its most active phase with the Republican convention, stocks remained remarkably stable this week. The Fed will likely keep interest rates lower for longer, even in the case of a quick job market recovery and an uptick in inflation, which could provide additional support for stocks in the coming years. The S&P 500 and the Nasdaq hit new all-time highs again, and even the relatively weak Dow is now within striking distance of its respective record high. The U.S.COVID numbers continued to improve slowly, and despite the raging outbreak in India, global risk assets ticked higher, with U.S. equities still being the clear leaders of the recovery.
The majority of the week’s key economic releases were bullish yet again, but we got a couple of worrisome reports as well. The CB consumer confidence number plunged lower unexpectedly, the number of continuing jobless claims remained above 14 million. However, positive personal spending and personal income surprises calmed investors’ worries regarding the consumer economy. The housing market continues to be the engine of the recovery, with pending home sales and new home sales both blowing away expectations. The recently weaker manufacturing sector also showed promise this week, especially the durable goods report, with the Chicago PMI and the Richmond Manufacturing Index beating the consensus estimates as well.
The technical picture improved thanks to the Dow’s breakout, and while the industrial average is still below its pre-pandemic high, all of the key trend indicators confirm the bull market. 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 drifted higher together with the broader market, but the Russell 2000 remains technically weak, despite closing the week above both its moving averages again. The Volatility Index (VIX) spiked to a one-month high following the Fed Chair’s speech, and the “fear gauge” closed the week just below its 50-day moving average, near 23.
Market internals showed slight negative divergences due to the relative weakness of small-caps this week, and bulls would still like to see more stocks joining the rally. The Advance/Decline line failed to hit a new bull market high despite the rally, but advancing issues still outnumbered decliners by a 2-to-1 ratio on the NYSE and by a 3-to-1 ratio on the Nasdaq. The average number of new 52-week highs inched higher on both exchanges, rising to 48 on the NYSE and 63 on the Nasdaq. The number of new lows also increased in the meantime, rising to 7 on the NYSE, and to 18 on the Nasdaq. The percentage of stocks above their 200-day moving average increased slightly, but the indicator remains below its recent multi-month high, since it finished near 58% on Friday.
Short interest was virtually unchanged on Wall Street, but some of the most-shorted issues still performed very well as the large-cap benchmarks hit new record highs. National Beverage (FIZZ) had a blowout week, continuing its technical breakout, and as its short interest is still above 50%, the short squeeze could even gather more steam. Albemarle (ALB) popped up on the list of stocks with the highest days-to-cover (DTC) ratios, with a reading of 11, and the stock could be ready to test its pre-pandemic high following a three-week-long consolidation period. C.H. Robinson (CHRW) also sports a DTC ratio of 10, and the stock is now just a hair below its all-time high, possibly gearing up for a major breakout.
We are in for another week of crucial economic releases, with the job market and Friday’s government jobs report, in particular, at the center of attention. Before that, the ISM manufacturing PMI will be out on Tuesday, the ADP payrolls number will highlight Wednesday’s session, with the ISM non-manufacturing PMI coming out on Thursday. Treasury yields and the dollar will also remain under scrutiny in the wake of the Fed’s policy shift. Since the currency hit a new 27-month low against a basket of currencies, yields are virtually unchanged since Jerome Powell’s crucial speech. Trading activity and volatility could increase significantly in the coming weeks, following the seasonal patterns. Apart from the weakness among small-caps, bulls seem to have a firm grip on the market. Stay tuned!
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