While nervous trading was the name of the game throughout the holiday-shortened week due to the fears of a global epidemic, U.S. stocks held up very well until Friday. Oil and travel-related stocks took the biggest hit, and the price of the crucial commodity hit its lowest level since early-November. The Trump administration’s plan to develop the second round of tax cuts, targeting the middle class, in the coming three months, boosted consumer-related stocks. The European Central Bank’s (ECB) announcement regarding its first strategy review in almost two decades also helped equities globally, especially since we are now less than one week away from the Fed’s next monetary meeting.
Although the week has been relatively low on key economic releases, the most important overseas reports were encouraging, and the domestic indicators also showed stability. Existing home sales were well above expected in December, while the weekly number of new jobless claims remained very low, which is consistent with a healthy job market. The Markit manufacturing PMI inched lower, in contrast to last week’s bullish Philly Fed Index, but the services sector continues to expand according to the services PMI too. Despite the stable domestic economic trends, Treasury yields plunged lower across the curve, due to the coronavirus-related fears and the ECB’s strategy review.
The bullish technical picture hasn’t changed much this week, despite the pullback in stocks, with the tech sector still showing relative strength and the key trend indicators confirming the advancing trend on Wall Street. The S&P 500, the Nasdaq, and the Dow are still well above their rising 200-day moving averages, and the benchmarks also remain above their steeply rising 50-day moving averages. Small-caps lagged the broader market following last week’s strong showing, but the Russell 2000 is still above its short- and long-term moving averages. The Volatility Index (VIX) briefly spiked above 16 level amid the fears of a global epidemic, but it remained below its year-to-date high and closed the week near the still low 14.5 level.
Market internals took a hit due to the relative weakness of small-caps, but the most reliable measures continue to show stability, and there are no major negative divergences present. The Advance/Decline line pulled back as safe-haven assets rallied, as decliners outnumbered advancing issues by a 3-to-2 ratio on the NYSE, and by a 5-to-4 ratio on the Nasdaq. The average number of new 52-week highs declined on both exchanges, falling to 110 on the NYSE and 123 on the Nasdaq. The number of new lows increased in the meantime, rising to 31 on the NYSE and to 41 on the Nasdaq. While the percentage of stocks above their 200-day moving average remained below last week’s multi-year high, the indicator still closed near the healthy 68% level on Friday.
Short interest remains very low on Wall Street, even in the wake of this week’s scare, but the most-shorted issues slightly underperformed the broader market. MiMedx (MDXG) defied gravity this week following its multi-week pullback, and with the stock’s short interest still being above 60%. Sea Limited (SE) also has a very high short interest of 58%, and it hit a new all-time high this week, which could trigger a short squeeze in the coming weeks. Beverage manufacturer Brown-Forman (BF-B) popped up on the list with the high days-to-cover (DTC) ratios, with a reading of 15 and since the stock has been hitting new all-time highs for several months in a row now, bears have to be under a lot of pressure.
The earnings season will switch into full gear next week, and while this week’s reports were mixed, the overall picture is still bright, so stocks could get another boost from the numbers of the tech giants. Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), and Facebook are valued at over $4 trillion thanks to the recent rally, so a lot will be at stake for the whole market, especially as Visa (V) and Mastercard (MA) Exxon (XOM), Verizon (VZ), Coca-Cola (KO) will also publish their reports. Besides earnings, the coronavirus epidemic, and the Fed’s rate decision on Wednesday, investors will be focusing on the durable goods report and CB consumer confidence number on Tuesday. The advance fourth-quarter GDP will be released on Thursday, and the crazy week will end with the core PCE Price Index, personal spending, and the Chicago PMI on Friday. Stay tuned!
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