We had one of the most volatile weeks on Wall Street since the end of the financial crisis over ten years ago, as investors tried to gauge the economic effects of the coronavirus outbreak. The Fed tried to calm markets with an emergency 0.5% rate cut on Tuesday, but that, Joe Biden’s Super-Tuesday-comeback, and even the International Monetary Fund’s (IMF) $50 billion coronavirus package were not enough to stop the selloff in global risk assets. The week ended on a negative note, and even though most stocks closed above their recent lows, volatile trading will likely continue in the coming weeks.
Despite the mounting economic worries, the key indicators leaned bullish yet again this week, with especially the government jobs report blowing away expectations on Friday. Non-farm payrolls surged higher by 273,000, while wage growth remained strong, and the unemployment rate ticked lower unexpectedly to 3.5%. The ISM non-manufacturing PMI was also very strong, as was construction spending, but the manufacturing sector sent a few warning signs. The ISM manufacturing PMI inched closer to the 50 level again, while factory orders also missed the consensus estimate, and the IDB/TIPP economic optimism number was lower-than-expected as well, likely due to the virus-related fears.
The technical picture continues to be bearish as far as the short-term time frame is concerned, but investors still do not have a good reason to think that the bull market is over, despite the spike in volatility. The S&P 500, the Nasdaq, and the Dow are now all well below their 50-day averages, with only the tech benchmark holding up above its 200-day moving averages. Small-caps continue to show relative weakness, and the Russell 2000 was the first index to violate its low from last week on Friday amid the continued exodus out of risk assets. The Volatility Index (VIX) hit a multi-year high again due to the wild swings and the high level of uncertainty, as it closed near 42, after briefly topping the 50 level on Friday.
Market internals remained weak as small-caps continued to lag the broader market, and the most reliable breadth indicators have not shown meaningful positive divergences yet. The Advance/Decline line hit a new low even though the major indices remained above their lows from last week, as decliners outnumbered advancing issues by a 2-to-1 ratio on the NYSE, and by a 3-to-2 ratio on the Nasdaq. The average number of new 52-week highs remained very low on both exchanges, falling to 8 on the NYSE and 16 on the Nasdaq. The number of new lows declined in the meantime, dropping to 250 on the NYSE and 217 on the Nasdaq. The percentage of stocks above their 200-day moving average remained near last week’s levels, closing the week below 30% again.
Short interest continued to climb despite the Fed’s rate cut and the bounce in the major indices as the global risk-off shift weighed heavily on the most-shorted issues. Sea Ltd. (SE) remained relatively strong this week, even considering its Friday pullback, and since the stock still has a short interest of 44%, it could soon hit new a new all-time high again. Digital Realty (DLR) recovered well from last week’s selloff, and since it still sports a very high days-to-cover (DTC) ratio of 13, its relative strength could be foreshadowing a strong rally. Rollins (ROL) has also been showing encouraging strength this week, and in light of the stock’s DTC ratio of 12, it could be ready to conclude its year-long consolidation.
While we will have a relatively quiet week with regard to economic releases, it is safe to say that traders will not be bored, as volatility will likely remain extremely high. The NFIB Small Business Index will be released on Tuesday, the Consumer Price Index (CPI) and the Producer Price Index (PPI) are scheduled for Wednesday and Thursday releases respectively, while the week will end with the Michigan consumer sentiment number. The Fed could once again be in the spotlight as even though the Central Bank’s next scheduled meeting will be held later this month, many analysts expect another emergency rate cut, as early as Monday. Stay tuned!
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