New coronavirus cases hit the market’s performance

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Commenting on today’s trading with worry over coronavirus cases hitting stocks, Gorilla Trades strategist Ken Berman said:

While tech stocks had their worst day in almost a month on Friday and all of the key risk-on sectors lost ground, it wasn’t all doom-and-gloom for bulls.  Small-caps continued to show relative strength on Friday, and while traders once again took chips off the table ahead of the weekend break, the major indices still remain above their pre-epidemic highs.

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The Number Of Coronavirus Cases Outside China Increased

The major indices closed the week on a negative note for the fourth time in a row as the confirmed number of coronavirus cases outside China increased substantially, with the market-leading Nasdaq suffering the biggest hit. The Dow Jones Industrial Average (INDEXDJX:.DJI) was down 228, or 0.8%, to 28,992, the Nasdaq (INDEXNASDAQ:.IXIC) lost174, or 1.8%, to 9,577, while the S&P 500 (indexsp:.inx) fell by 35, or 1.1%, to 3,338. Decliners outnumbered advancing issues by an almost 7-to-3 ratio on the NYSE, where volume was slightly above average.

Even thought the Nasdaq and the S&P 500 hit new all-time highs, traders still had a hectic and nervous week on Wall Street. The strength of the traditional safe-haven assets well describes the coronavirus-related uncertainty that has been weighing on investor sentiment globally. It’s rare that the 30-year Treasury and gold hit multi-month and multi-year highs respectively during such a rally in equities, but that’s exactly what happened this week. Stocks also endured a steep late-week dip, and the majority of stocks finished the week in the red, amid the spike in volatility, the continued relative weakness of the Dow, and the almost three-year high in the dollar index.

Key Economic Releases Full Of Bullish Surprises

The key economic releases almost all provided bullish surprises this week, apart from Friday’s Markit PMIs, adding to the upward pressure on the dollar and hinting on yet another strong quarter in the U.S. economy. The Empire State Manufacturing Index and the Philly Fed Index both beat the consensus estimates by wide margins, with especially the latter measure surprising analysts with its second-largest monthly increase on record. Building permits, housing starts, and the Producer Price Index (PPI) showed increased economic activity as well, while the CB Leading Index confirmed the improving outlook. The global situation, on the other hand, is mixed, at best, with the coronavirus outbreak already affecting the largest Asian and European economies.

The holiday-shortened week hasn’t changed the bullish technical picture, and the key trend indicators continue to point higher, even as the major indices finished the week on a bearish note. The S&P 500, the Nasdaq, and the Dow all remain above their rising 200-day moving averages, and the benchmarks also closed the week above their steeply rising 50-day moving averages. Small-caps had their second encouraging week in a row, performing in line with the broader market, and while the Russell 2000 is still below its all-time high form 2018, it remains above both its moving averages. The Volatility Index (VIX) hit a three-week high above the 18 level on Friday amid the increase in global coronavirus cases and the fear gauge finished the week above both its moving averages.

Stable Market Internals

Market internals remained stable despite the hectic price action, and even though some of the most reliable breadth measures are still weak, they still don’t indicate an imminent correction. The Advance/Decline line hit another new bull market high thanks to small-caps this week, even as decliners outnumbered advancing issues by a 4-to-3 ratio on the NYSE, and by a 3-to-2 ratio on the Nasdaq. The average number of new 52-week highs was stable on both exchanges, ticking higher to 148 on the NYSE and 122 on the Nasdaq. The number of new lows increased again, rising to 81 on the NYSE and 72 on the Nasdaq. The percentage of stocks above the 200-day moving average declined in the second half of the week, finishing near the still formidable 64.5% level.

Shortsellers and coronavirus cases

Short interest was inched lower on Wall Street, and the most-shorted issues showed relative strength yet again, despite the continued worries regarding the global economy. Our previous pick, MiMedx Group (MDXG) attempted a breakout on Friday, in the face of the pullback in the major indices, and its short interest of 62% makes another rally likely following almost three months of consolidation. Sea Limited (SE) had another blowout week, despite Friday’s dip, and the stock’s short interest of 44% still looks very dangerous for bears. Digital Realty Trust (DLR) hit a new all-time high this week, on the heels of its quarterly report and the stock’s very high days-to-cover (DTC) ratio of 16 could mean that a short squeeze is ahead.

One of the most important questions of the coming week will be how the key safe-haven assets, such as gold, Treasuries, and the dollar will react to the coronavirus-related developments. The dollar's unprecedented rally, the Dollar Index (DXY) has been up 13 out of the last 15 sessions, caught a lot of analysts cold feet, but, for now, it hasn't affected domestic stocks too much. Next week, we will have another batch of crucial economic releases, which could also make waves in the stock, currency, and bond markets alike. The CB consumer confidence number will be released on Tuesday, the durable goods report and the preliminary GDP print will be out on Thursday, while the week will end with the Core PCE Price Index and personal spending. Stay tuned!

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