The rout in mega-cap banks made headlines this week, and even though the financial sector bounced back strongly in the latter half of the week, bank stocks remain among the weakest issues on Wall Street, which does not bode well for the broader market. The rising tension between the U.S. and China added to the pressure on risk assets, as the Trump administration openly attacked the Asian giant in several sensitive areas. Considering all of the negative headlines, stocks held up relatively well. Volatility will likely remain high, while the successful global reopening push continues. Even though the global COVID-situation is improving at a very slow rate, there is still no sign of major secondary outbreaks in Asia and Europe, which makes a quick economic recovery more likely.
The most important economic releases were slightly better this week than in the past month, but we still received some bearish surprises even considering the already conservative analyst expectations. The weekly number of new jobless claims came in just below 3 million, bringing the two-month total of claims above 36.5 million, but continuing claims were less-than-expected, giving hope for bulls that a lot of jobs will quickly come back thanks to the reopening push. The NFIB Small Business Index, the Empire State Manufacturing Index, and Michigan consumer sentiment number were each above the consensus estimates, but the Consumer Price Index (CPI) and the Producer Price Index (PPI) both confirmed the deflationary pressures in the U.S. economy. Retail sales and industrial production both plunged by historical amounts.
Even though the major indices experienced wild swings this week, the mixed technical picture has not changed much. Despite the sharp early-week sell-off the benchmarks are holding on to most of their post-crash gains. The S&P 500, the Dow, and the Nasdaq all closed the week above their declining 50-day moving averages, but apart from the tech benchmark, the indices are still trading below their 200-day moving averages. Small-caps led the way lower in the first half of the week, with the Russell 2000 hitting a fresh three-week low, but the index still closed the week above its 50-day moving average, although it’s still well below its long-term indicator. The Volatility Index (VIX) surged higher and hit its highest level in over two-weeks as stocks took a nosedive, but the “fear gauge” closed the week well below its weekly high, near the 32 level.
Market internals are still showing clear signs of weakness as small-caps continue to struggle, and the most reliable breadth measures all took a hit in the first half of the week. The Advance/Decline line fell sharply this week, hitting its lowest level since late April, as decliners outnumbered advancing issues by a 4-to-1 ratio on the NYSE, and by a 5-to-1 ratio on the Nasdaq. The average number of new 52-week highs declined on both exchanges, edging lower to 16 on the NYSE and 40 on the Nasdaq. The number of new lows increased in the meantime, jumping to 43 on the NYSE and 58 on the Nasdaq. The percentage of stocks above their 200-day moving average dropped sharply together with the major indices until Thursday. However, thanks to the strong rebound, the measure finished only slightly lower near the 21.8% level.
Short interest increased due to the geopolitical tension and the economic uncertainty this week, but the most-shorted issues were among the leaders toward the end of the week amid the broad short squeeze. ANGI Homeservices (ANGI) surged higher this week, defying the market-wide sell-off, and since its short interest is 50%, it could mean that its fresh nine-month high will not signal the end of the rally. iRobot (IRBT) continues to show relative strength, holding up above its February high, and it still sports short interest of 49% despite its lofty post-crash gains. Current GorillaPick, Hormel Foods (HRL), is still near the top of the list with the highest days-to-cover (DTC) ratios, with a reading of 10, which could fuel a short-covering rally in the coming weeks.
The housing market and the manufacturing sector will be in focus in terms of economic releases next week, and bulls hope that this week’s improvements will continue in earnest. The week will kick off with the NAHB Housing Market Index on Monday, building permits and housing starts will be released on Tuesday, the FOMC meeting minutes will highlight Wednesday’s session, while the Philly Fed Index, the Markit manufacturing PMI, and the weekly number of new jobless claims could lead to a volatile session on Thursday. Fed Chair Jerome Powell will testify on Tuesday and Thursday, and since the global reopening push will reach a critical phase, we are likely in for another very busy week. Stay tuned!
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