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By Pete Biebel, Senior Vice President

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Last week the market was like a dance competition where the top prize went to a group in which a half dozen members at the front of the lineup were wowing the crowd while the rest of the troupe was tripping and stumbling behind them.  Rallies in a relative handful of the mega-cap tech stocks, before and after their earnings announcements, enabled the NASDAQ Composite Index (COMP) to waltz to a 3.69% gain for the week.  The NASDAQ 100 Index (NDX) was a step or two better with a 4.18% hop.  The S&P 500 Index couldn’t find the same rhythm and staggered to less than half of COMP’s gain.  The Dow Jones Industrial Average (DJIA) moonwalked through the week, going backwards by 0.16%.  It was very clear who the stars of the show were, but what wasn’t so clear was how poorly the other performers staggered through the week.

On its two best days last week, COMP gained 1.64% on Monday and 1.47% on Friday.  A quick peek behind the curtain reveals that the NASDAQ had a negative advance/decline ratio on both of those days, and it wasn’t by just a little.  On Monday, the number of declining issues on the NASDAQ outnumbered gainers by more than two-to-one.  On Friday, the ratio was just under two-to-one negative.  Keep in mind that those ratios did not play out on days when the index merely sashayed a skosh higher.  COMP averaged gains of more than 1.5% on those days and the advance/decline was still overwhelmingly negative.  For what it’s worth, the NYSE also had negative advance/decline ratios on Monday and Friday; days that SPX gained about 0.75%.

Thanks to Friday’s earnings-inspired romp higher, the major averages all finished at or near their highs of the week.  Friday also produced a glaring example of how the performance of relatively few stocks can mask the deterioration of the majority.  The gains that day, in less than a tenth of the thirty DJIA component stocks, contributed about 258 points to the index that day.  That means the contribution of the other 90% of DJIA’s stocks was a loss of more than 220 points.  Despite last week’s dance higher, neither COMP nor NDX reached new highs.  SPX got close to a new recovery high but is still about 3 ½% below its February high.

So, despite last week’s performance, it seems that the prima donnas are growing weary while the rest of the cast continues to stagger.  The three of the top four performing U.S. equity sectors last week were the same three that have led the market higher over the past four months: Technology (+5.09% for the week), Communication Services (+2.25%) and Consumer Discretionary (+1.08%).  All three of those sectors include one or more of the mega-cap tech stocks that have been the star performers and that rocketed higher on earnings news last week.

One surprise last week was that the second-best sector on the week was the lowly Real Estate sector.  Six months ago, I wrote that the sector seemed to be very richly valued.  It depreciated about 40% from its February high to its March low during the overall market’s sell-off.  Even with the help of lower interest rates, its rebound from the March low has been much less constructive than most of the other sectors.  Its rebound high was in early-June.  Last week’s 4.2% gain got the sector back to near that June high, but it appeared to be a pop in response to earnings news from several of the sector’s components.  Eight of the other ten U.S. equity sectors have better gains over the past five weeks than Real Estate.  The sector is going to need help from the overall market if it’s going to see any significant follow-through on last week’s gains, and that doesn’t seem very likely.

Precious metals had another shining week.  Nearby gold futures gained almost 5% for the week while silver futures tacked on more than 7%.  Again, a weaker U.S. Dollar and lower interest rates contributed to the rallies.  Both metals are now a bit overbought on a short-term basis.

SPX ended last week just above 3271, that’s its highest weekly close since February, but it’s still slightly below the June intraday highs.  The index will need to climb about 2% from here to close the gap left on the breakdown in March.  That seems to be a reasonable near-term target.  The first possible early warning sign of a longer and more destructive timeout would be taking out last week’s low, which came Thursday morning with SPX near 3204.  The next logical level of support would be the 50-day moving average, which ended Friday near 3138, but climbing about 7 points each day.  Dropping below 3115, the July 9th low, would likely establish the 3050 area and the 200-day moving average as the next downside target.

Perhaps a better short-term indicator will be NDX as it will more specifically reflect any improvement or deterioration in the leading names.  That index has repeatedly found support at its 20-day moving average as it has stair-stepped higher over the past four months.  NDX flirted with breaking below that average through the first four sessions last week until the mega-cap tech stock pop on Friday saved the week.  NDX ended last week just above 10,900, about 2% above its 20-day average.  If NDX ends this week much below 10,500, it’ll probably mean that the timeout has begun.

This first week of August brings a real variety show of potential market catalysts.  Traders will be watching the whacky antics in Washington D.C. to see if Congress is able to make any progress on a new stimulus package.  The always entertaining earnings season reports, why still numerous, are likely to be less spectacular this week.   The economic report calendar includes several crowd favorites with the manufacturing data early in the week and the employment statistics late in the week most likely to provoke a big audience reaction.

Date Report Previous Consensus
Monday 8/3/2020 PMI Manufacturing Index, July 49.8 51.3
  ISM Manufacturing Index, July 52.6 53.5
  Construction Spending, June, M/M -2.1% +1.3%
Tuesday 8/4/2020 Motor Vehicle Sales, July, SAAR 13.1mm 14.0mm
  Factory Orders, June, M/M +8.0% +5.2%
Wednesday 8/5/2020 ADP Employment Report, July +2,369K +1,888K
  International Trade, Trade Deficit, June $54.6B $50.3B
  PMI Services Index, July 47.9 49.6
  ISM Non-Manufacturing Index, July 57.1 55.0
Thursday 8/6/2020 Initial Jobless Claims 1,434K 1,442K
Friday 8/7/2020 Employment Situation, Non-Farm Payrolls, July, M/M +4,800K +2,000K
  Unemployment Rate, July 11.1% 10.5%
  Wholesale Trade, June, M/M -1.2% -2.0%

 

Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.

August 3, 2020 |