The week started spectacularly on Wall Street, with a record-breaking surge on Monday morning, but the Nasdaq entered a sharp pullback following its incredible run later on. The traditional cyclical sectors and small-caps, on the other hand, finally showed relative strength thanks to the mostly bullish corporate earnings surprises, positive vaccine-related reports, and the encouraging economic indicators. The number of new COVID cases remained very high in the U.S. and globally, and there is still no end in sight for the pandemic, which could hurt risk assets in the coming weeks. The notable escalation of the U.S.-Chinese diplomatic standoff was also weighing on investor sentiment throughout the week, as even though the current sanctions like the Huawei ban are minor issues for the global economy, the latest rumors suggest more significant measures in the future.
The majority of the key economic releases were bullish this week, with almost all sectors confirming the strong post-lockdown recovery. The high number of new jobless claims was probably the most worrisome sign, and since continuing claims also remain high, investors should keep an eye on the labor market. The Philly Fed Index, the Empire State Manufacturing Index, industrial production, retail sales, core retail sales, and the NAHB Housing Market Index were all much better-than-expected. The higher-than-expected Consumer Price Index (CPI) is a good sign for the consumer economy too. The NFIB Small Business Index was a tad above forecast as well, just as housing starts, but building permits and the Michigan consumer sentiment number missed expectations.
The technical picture improved little this week despite the pullback in the tech sector, as the Dow and the S&P 500 both hit five-week highs. The industrial average is now moving above key technical levels as well. The S&P 500, the Dow, and the Nasdaq all closed the week above their 50-day moving averages, the indices are also now clearly above their 200-day moving averages. Small-caps had a mixed week, even considering the fresh one-month high of the Russell 2000, but the index finished the week on a positive note, finally closing above both of its moving averages. The Volatility Index (VIX) got close to the 35 level during its early-week spike higher, but as stocks settled down, the “fear gauge” slipped and finished considerably lower, near the 25 level on Friday.
Market internals improved markedly in the latter half of the week, and despite the recent negative divergences, the most reliable breadth measures are still confirming the rally. The Advance/Decline line got close to its recovery high, turned lower, as advancing issues outnumbered decliners by a 4-to-1 ratio on the NYSE, and by a 6-to-5 ratio on the Nasdaq. The average number of new 52-week highs increased on both exchanges was virtually unchanged on both exchanges, edging higher to 50 on the NYSE but falling to 68 on the Nasdaq. The number of new lows rose in the meantime, ticking higher to 7 on the NYSE and 13 on the Nasdaq. The percentage of stocks above their 200-day moving average increased significantly thanks to the rally in small-caps, and the indicator finally closed the week back well above the 40% level, near 46%.
Short interest declined sharply following a mid-week short squeeze on Wall Street, and the most-shorted issues outperformed the large-cap benchmarks on a weekly basis. Ligand Pharma (LGND) drifted higher this week despite the volatile trading conditions, and given the stock’s short interest of 56%, it could be ready to break out to a new one-year high. National Beverages (FIZZ) also continues to show technical signs of buying pressure, and its still sky-high short interest of 51% could fuel further gains in the coming months. C.H. Robinson (CHRW) hit a new nine-month high this week, erasing its June correction, and the stock’s days-to-cover (DTC) ratio of 8 means that shorts could be in for a rough period.
The economic calendar will be a lot less busy next week following this week’s data dump, but we will still get a few critical releases, especially toward the end of the week. Earnings season will continue in earnest next week, with the first big names from the all-important tech sector, such as Microsoft (MSFT), Intel (INTC), and Texas Instruments (TXN), and the likes of Verizon (VZ), AT&T (T), and Coca-Cola (KO) highlighting the earnings calendar. Apart from the Sun Belt, the COVID numbers from India and Brazil will likely remain in focus as those fragile emerging economies continue to be under immense pressure. That said, bulls remain in control of financial markets, and U.S. stocks are still among the strongest assets from a global perspective. Stay tuned!
Read what Gorilla Trades has to say every weeknight, get the top stock market picks that the internet has to offer and start investing like the pros. Try the Gorilla Trades stock picking service free of charge now!
The Gorilla has gone mobile! Download our stock picking app now for the hottest stock picks delivered right to your phone!