Following a two-week-long choppy pullback, stocks took a nosedive this week as the second European COVID wave got even more serious, and the number of U.S. cases also hit a new record. The fact that hospitalizations also started to creep higher contributed to the global risk-off shift, together with the election-related uncertainty and the fading stimulus hopes. The string of bullish earnings surprises was not enough to stop the rout, but while European stocks and crude oil hit their lowest levels since May, the relatively strong U.S. benchmarks held up well once again from a technical perspective. Treasuries also had a wild week ahead of next week’s crucial events, but interestingly, yields closed well north of their weekly lows despite the gloomy sentiment on the Street.
While this week’s economic releases leaned bullish again, there were a few notable negative surprises and, especially from the housing sector. New and pending home sales both missed expectations by wide margins, and even though the Case-Shiller Housing Price Index was much higher-than-expected, the real estate sector was among the weaker ones this week. The highly-anticipated third-quarter GDP print came in at a record-breaking 33.1%, handily above the consensus estimate, and the GDP Price Index also confirmed the strong rebound in activity. The weekly jobless claims report beat expectations across the board for the second week in a row, personal spending and personal income also provided bullish surprises, and although the CB consumer confidence number missed by a hair, consumer-related issues could continue to enjoy tailwinds in the coming months.
The short-term technical picture quickly deteriorated this week, as the major indices violated several key support levels during the steep selloff, and their lows from September are now back at the center of attention. The S&P 500, the Dow, and the Nasdaq are back below their 50-day moving averages, but the benchmarks are still above their 200-day moving averages. While small-caps were also hit hard this week, the Russell 2000 remains in a slightly better technical position compared to its large-cap peers, even though it closed the week below both its moving averages. The Volatility Index (VIX) skyrocketed to a four-month high ahead of next week’s elections and the Fed’s monetary meeting, as investors rushed for the exits amid the resurgence of the virus, and the fear gauge closed the week near the 38 level.
Market internals confirmed the risk-off shift, and the sudden and sharp pullback in the major indices with the most reliable breadth measures all turning lower following several weeks of positive divergences. The Advance-Decline line hit a one-month low due to the broad-based selloff, as decliners outnumbered advancing issues by a 12-to-1 ratio on the NYSE and a 10-to-1 ratio on the Nasdaq. The average number of new 52-week highs dropped sharply on both exchanges, falling to 14 on the NYSE and 18 on the Nasdaq. The number of new lows surged higher in the meantime, rising to 45 on the NYSE and 53 on the Nasdaq. The percentage of stocks above their 200-day moving average also suffered a sizable hit, getting close to the 50% level once again and closing the week near 52%.
Short interest jumped higher due to the increasing uncertainty and the looming elections this week, with many participants increasing their hedges and taking profits following the strong post-crash rally. While Tesla’s (TSLA) short interest is now below 8%, which still represents a market value of roughly $30 billion, the stock’s relative strength and the company’s great earnings report could hint at another painful rally for shorts. Stitch Fix (SFIX) also sports a high short interest of 39%. Following a blowout October, short covering could push the stock toward its all-time high in the coming months. ViacomCBS (VIAC) has been trading in a quiet consolidation pattern since mid-September. It has been starting to show signs of relative strength this week, and with the stock’s very high days-to-cover (DTC) ratio of 11 in mind, it could be ready to resume its recovery rally.
Investors could be in for one of the craziest weeks of the year, as Tuesday’s Presidential election and Thursday’s Fed meeting both have the potential to trigger outsized moves. A contested election would likely be the worst outcome for risk assets, but a smooth vote with a clear winner could easily lead to a strong relief rally on Wall Street. As for economic releases, Monday’s ISM manufacturing PMI, Wednesday’s ADP payrolls number and ISM services PMI, and Friday’s government jobs report will be in focus, and earnings season will also continue with a slew of tech and consumer-related names. Stay tuned!
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