Fed’s unlimited QE program boosts markets in volatile week

Fed’s unlimited QE program boosts markets in volatile week
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Commenting on the corporate bailouts, the Fed’s unlimited QE program and today’s trading Gorilla Trades strategist Ken Berman said:

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While the late-session selloff on Friday wasn’t 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.  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.

The major indices all finished significantly lower following one of the strongest three-day rallies in history, despite the approved U.S. stimulus bill, as the global COVID-19 situation continued to deteriorate. The Dow Jones Industrial Average (INDEXDJX:.DJI) was down 915, or 4.1%, to 21,637, the Nasdaq (INDEXNASDAQ:.IXIC) lost 295, or 3.8%, to 7,502, while the S&P 500 (indexsp:.inx) 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 extremely high again.

Bulls Make A Comeback

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 miles 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 there won't be secondary outbreaks in China and South Korea.

The Fed’s unlimited QE program and emergency rate cut helped investor sentiment this week, but the economic uncertainty led to continued pressure on credit market. The key economic releases were mixed yet again this week, but several indicators still didn't fully reflect the effects of the pandemic. The week will likely be remembered because of 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 well below expected, but the key manufacturing PMIs beat expectations, just as durable goods orders, personal income, and new home sales.

Technical Picture Remains Bearish

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 its 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, and the fear gauge closed the week above the still extremely high 65 level, due to the economic uncertainty.

Market internals improved substantially thanks to the broad rally, but even though a V-shaped recovery is not impossible, the current positive divergences have to be taken with a grain of salt in light of the extreme market conditions. The Advance/Decline line bounced back sharply this week, as advancing issues outnumbered decliners by a 15-to-1 ratio on the NYSE, and by a 14-to-1 ratio on the Nasdaq. The average number of new 52-week highs was close zero on both exchanges, edging lower to 1 on the NYSE and 3 on the Nasdaq. The number of new lows collapsed in the meantime, falling to 130 on the NYSE and 125 on the Nasdaq. The percentage of stocks above the 200-day moving average increased somewhat thanks to the strong rally, but the measure remains near its multi-year low, finishing the weak at 9%.

Short Interest Decrease Due To The Corporate Bailouts And The Fed’s Unlimited QE Program

Short interest decreased on Wall Street for the first time in a month, as bears rushed to the exits due the corporate bailouts and the Fed’s unlimited QE program.  While Match Group (MTCH) had a rough time, so far, this year, the stock was among the strongest issues this week, and its short interest of 38% could fuel further gains should the market continue to normalize. Our previous pick, Sea Ltd. (SE) joined the rally, finishing almost 20% higher, and since the stocks short interest increased to 45%, it could continue to outperform. Hormel Foods (HRL) couldn’t get close to its recent all-time high this week, but it remained stable amid the volatile swings in the major indices, and it’s 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 and more and more indicators are expected to be influenced by the pandemic, but the 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. Stay tuned!

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