While volatility declined significantly on Wall Street compared to the second half of March this week, the major indices failed to extend their bounce, all finishing lower on a weekly basis. Last week’s rally was fueled by the unprecedented monetary and fiscal steps taken across the globe, but the dire economic reality took center stage this week. Even though we saw encouraging developments in Europe concerning the likely length of the COVID-related lockdowns, investor sentiment turned gloomy due to the rapid deterioration in the U.S. Since economic uncertainty remains high, risk assets could remain under pressure despite the fact that valuations already look attractive in some sectors.
Some of the key economic indicators still did not reflect the pandemic-related damage, but a lot of forward-looking measures confirmed the sharp slowdown in economic activity. The job market sent bearish signals for the second week in a row, despite the better-than-expected.ADP payrolls number. The weekly number of new jobless claims surged above 6.5 million, while, according to the government jobs report, non-farm payrolls declined by 701,000, and the unemployment rate rose to 4.4% in March. The ISM manufacturing and non-manufacturing PMIs both beat expectations, while the Chinese PMIs recovered miraculously. However, analysts predict that the U.S. PMIs will turn sharply lower in April.
The technical picture remains bearish despite last week’s bounce, and although the major indices are holding up well above their lows from March, all of the key trend indicators continue to point lower. The S&P 500, the Nasdaq, and the Dow are still all well below their declining 50-day averages, and the benchmarks are also all below their now-declining 200-day moving averages. Small-caps had a decisively bearish week, and the Russell 2000 got close to its crash low, finishing the week deep below both its moving averages. The Volatility Index (VIX) has been drifting lower all week, which was probably the most bullish development on Wall Street, but the fear gauge still closed the week near the extremely high 46 level.
Market internals deteriorated following last week’s improvements as the weakness among small-caps weighed on the most reliable breadth measures. The Advance/Decline line got close to its bear market low due to the broad weakness, as decliners outnumbered advancing issues by a 6-to-1 ratio on the NYSE, and by a 7-to-1 ratio on the Nasdaq. The average number of new 52-week highs was once again close to zero on both exchanges, ticking higher to two on the NYSE and five on the Nasdaq. The number of new lows declined, falling to 91 on the NYSE and 95 on the Nasdaq. The percentage of stocks above their 200-day moving average remained very low, as the measure finished the week virtually unchanged, near 9%.
Short interest was relatively flat this week on Wall Street, but a lot of participants have likely been selling into the short-covering rally last week, as the total amount of bearish bets remains high. Sea Ltd. (SE) remained stable in the choppy environment, and while the coming weeks could be rough, the stock’s short interest of 45% could boost its recovery. PetMed Express (PETS) is also near the top of the list of stocks with the highest short interest, with a 49% reading, and the stock hit a new 18-month high this week, which could spell trouble for bears. Hormel Foods (HRL) finished the week near its all-time high, remaining relatively strong throughout the week, and with the stock’s very high days-to-cover (DTC) ratio of 14, it could be ready for a technical breakout.
Investors will likely pay even closer attention to the economy next week, but the evolution of the COVID-19 pandemic will likely determine price trends across asset classes. The U.S. situation is expected to get worse, judging by the course of the European outbreaks, and the East Coast will likely remain the epicenter of the pandemic. The speed of the European improvements will be crucial for risk assets, as the length of the lockdowns remains the biggest risk factor. The price of oil could see volatile swings again, even in light of the likely supply cuts by OPEC. The energy sector continues to be the most sensitive to the pandemic, with the sector’s troubles also weighing on financials. Stay tuned!
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