Stocks Record A Positive Week

The stock market finished significantly lower on Friday, after one of the strongest three-day rallies in history. The pullback occurred despite the approval of the U.S. stimulus bill, as the global COVID-19 situation continued to deteriorate. The Dow was down 915, or 4.1%, to 21,637, the Nasdaq lost 295, or 3.8%, to 7,502, while the S&P 500 fell by 89, or 3.4%, to 2,541. Decliners outnumbered advancing issues by a 3-to-1 ratio on the NYSE, where volume was moderately heavy.

Traders said that while the late-session selloff on Friday was not pretty, the major indices held on to most of their mid-week gains, giving hope for bulls that last week’s lows might be successfully defended. As one trader explained, “We saw a textbook risk-off shift on Friday, with utilities and healthcare stocks performing well and tech issues and industrials struggling together with the energy sector, but technically speaking, last week’s lows look safe, for now, which is already a huge plus for bulls.”

Following one of the worst week’s for stocks in history, bulls staged an epic comeback this week, with the Dow gaining over 16% in three days. Despite the rally, which was fueled by an unprecedented response from global governments and central banks, the major indices remain a long way below their pre-pandemic levels. The uncertainty regarding the length of the necessary, but economically damaging global lockdowns continues to weigh on risk assets, and equities finished the week on a negative note. Volatility will likely remain very high for several weeks, and bulls hope that we will get positive reports from Europe, and that there will not be secondary outbreaks in China and South Korea.

The Fed’s unlimited quantitative easing program and emergency rate cut helped investor sentiment this week, but the economic uncertainty led to continued pressure on the credit market. The key economic releases were mixed again this week, but several indicators still did not fully reflect the effects of the pandemic. The week will likely be remembered by the record number of new jobless claims, as the measure came in at 3.283 million, eclipsing even the pessimistic consensus estimate of 1.5 million. Services PMIs hit record lows in Europe and Australia, with the U.S. Markit services PMI also coming in much weaker than expected, but the key manufacturing PMIs beat expectations, along with durable goods orders, personal income, and new home sales.

The technical picture continues to be bearish across the board, despite the mid-week surge in stocks, with all of the key trend indicators still pointing 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 200-day moving averages. Small-caps finally showed relative strength during the crazy short-covering rally, but despite the positive week, the Russell 2000 closed below both its short-and long-term moving averages on Friday. The Volatility Index (VIX) only finished slightly lower despite the double-digit gains of the major indices, as the fear gauge closed the week above the still extremely high 65 level due to the economic uncertainty.

Short interest decreased on Wall Street for the first time in a month, as bears rushed to the exits due to the corporate bailouts and the Fed’s unlimited QE program. While Match Group (MTCH) has had a rough time so far this year, the stock was among the strongest issues this week. Its short interest of 38% could fuel further gains should the market continue to normalize. Sea Ltd. (SE) joined the rally, finishing almost 20% higher, and since the stock’s short interest increased to 45%, it could continue to outperform. Hormel Foods (HRL) could not get close to its recent all-time high this week, but it remained stable amid the volatile swings in the major indices, and its still very high days-to-cover (DTC) ratio of 14 means that there are plenty of shorts that would be squeezed by a rally.

We will have a very busy week of economic releases, as more and more indicators are expected to be influenced by the pandemic. However, domestic releases could be eclipsed by a couple of Chinese reports coming out on Tuesday. The fact that the Asian country is slowly getting back to normal already could make its manufacturing and services PMIs crucial, especially given China’s key role in global supply chains. As for the U.S., the Chicago PMI and the CB consumer confidence number will be out on Tuesday, the ISM manufacturing PMI will be released on Wednesday, while the week will end with the government jobs report and the ISM non-manufacturing PMI. Of course, the virus-related headlines will likely be at the center of attention, with especially the evolution of the European and U.S. outbreaks being crucial for risk assets.

As always, have a great evening, stay calm, stay home, stay healthy, do your part to flatten the curve and stay tuned!!!

Joe