Just looking at the key domestic economic releases, the fears of a continued global recession might seem a bit overblown, as the recovery still seems to be on track, even considering the bearish jobless claims report. That said, the weak European services PMIs coupled with the resurgence of the virus, raised questions about the global situation and led to weakness in the key cyclical sectors. The Market U.S. manufacturing and services PMIs came in above the consensus estimates, with both signaling modest growth, and confirming the relative strength of the domestic economy. The housing market also sent reassuring signals following last week’s disappointments with new and existing home sales both hitting fresh 14-year highs, topping 1 million, and 6 million units respectively.
The technical picture remains mixed following the hectic but directionless week, with the short-term trend still being bearish. The Dow, the Nasdaq, and the S&P 500 are now all trading below their 50-day moving averages, but the large-cap benchmarks are still trading above their 200-day moving averages. Small-caps failed to hold on to their relative strength this week after suffering a major blow on Monday, and the Russell 2000 violated both its moving averages, closing just a hair above its long-term indicator. The Volatility Index (VIX) surged higher during Monday’s selloff despite last week’s encouraging trend, and the index tested the key 30 level several times before finishing near 26.5 on Friday.
Market internals suffered a hit, erasing last week’s improvements, and several key breadth measures hit new multi-month lows amid the selloff among small-caps. The Advance/Decline line hit a new correction due to Monday’s and Wednesday’s broad-based dips, with decliners outnumbering advancing issues by a 2-to-1 ratio on the NYSE, and by a 5-to-4 ratio on the Nasdaq. The average number of new 52-week highs fell sharply on both exchanges, dropping to 15 on the NYSE, and 19 on the Nasdaq. The number of new lows jumped higher in the meantime, rising to 41 on the NYSE, and 63 on the Nasdaq. The percentage of stocks above their 200-day moving average took a nosedive due to the Russell’s weakness, hitting a low below 45% before closing the week near 47%.
Short interest increased substantially this week, as institutional investors increased their hedging positions amid the growing political and economic uncertainty. SmileDirectClub (SDC) pulled back following last week’s breakout, but it remains above the key $10 price level, and it might be ready to confirm the technical pattern with the help of its still very high short interest of 38%. C.H. Robinson (CHRW) held up well in the turbulent environment, consolidating just below its all-time high, with its days-to-cover (DTC) ratio still making a short squeeze possible. Current GorillaPick, Charter Communications (CHTR), is also trading just below its record high, despite the market-wide correction, and that’s very bad news for bears as the stock sports a DTC ratio of 10.
Volatility is likely here to stay, as we have a very busy week of economic releases ahead, and the election campaign will also enter its next phase. The first Presidential debate is scheduled for Tuesday, and while Joe Biden is still appears to be the favorite to take the White House, a lot could still happen in the next five weeks. The CB consumer confidence number will be out on Monday, the Chicago PMI and pending home sales will highlight Wednesday’s session, the core PCE Price Index and the ISM manufacturing PMI will be out on Thursday, with the government jobs report concluding the busy week. Besides politics, COVID trends, and the economy, technicals will likely play a crucial role as well, as the major indices might even test their 200-day moving averages, should the pullback continue. Stay tuned!7
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