The technical picture is mixed in the wake of this week’s deterioration, with the short-term trend being negative, but the long-term bullish trend also being clearly intact. Only the Dow closed the week above its 50-day moving averages, while the Nasdaq and S&P500 closed below their short-term indicators, with the indices still trading above their 200-day moving averages. Small-caps had a strong compared to the large-cap benchmarks, and the Russell 2000 closed the week well above both its moving averages and its low from last week. The Volatility Index (VIX) has been showing encouraging positive divergence throughout the week, staying well below its recent peak, but it’s still above the 25 level and its 50-day moving average suggesting elevated uncertainty.
Market internals improved thanks to the relative stability of cyclicals and small-caps, which could mean that we are nearing the end of the overbought correction. The Advance/Decline line finally started to show relative strength this week, but decliners still outnumbered advancing issues by a 3-to-2 ratio on the NYSE, and by a 2-to-1 ratio on the Nasdaq. The average number of new 52-week highs bounced back on both exchanges, rising to 40 on the NYSE, and 38 on the Nasdaq. The number of new lows declined in the meantime, falling to 11 on the NYSE, and 13 on the Nasdaq. The percentage of stocks above their 200-day moving average increased substantially this week, and after hitting a new one-month low near 52%, the measure finished near 56.5% on Friday.
Short interest ticked higher for the third week in a row, with the tech sector really seeing increased hedging activity, but the most-shorted stocks held their ground yet again. SmileDirectClub (SDC) continued higher this week, hitting a six-month high in the process, and the stock’s short interest even increased to 39%, which could easily lead to a short-covering event in the coming weeks. Discovery (DISCA) popped up on the list with the highest days-to-cover (DTC) ratios, with a reading of 12, and the stock also scored three-month high this week, so it might be ready to move substantially higher. Materials giant Albemarle (ALB) also sports a DTC ratio of 9, and the stock quietly erased its recent correction in the face of the market-wide pullback, which makes another leg higher likely.
While technicals and the fate of the next stimulus bill will likely remain in focus next week following his week’s directionless trading, there will be plenty of key economic releases coming out. Existing home sales will be out on Tuesday, Wednesday’s session will see the release of the U.S. Market manufacturing and services PMIs, together with the most important European PMIs, new home sales are scheduled for Thursday, while the week will end with the durable goods report. Fed Chair Jerome Powell will also retake center stage, with his testimonies in Washington from Monday to Thursday, but it’s unlikely that he will significantly change his stance compared to this week’s announcements. Stay tuned!
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