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Guest posted by Gorilla Trades

Even considering Friday’s broad pullback and the weakness among small-caps, U.S. stocks continued to show resilience this week, and volatility remained fairly low on the last session of the week. The Russell 2000 was very weak for the second straight day and the downtick in Treasury yields also pointed to a pre-weekend risk-off shift, but the market-leading Nasdaq remained stable on Friday so the underlying bullish trend still looks safe. The entire week was full of gyrations in the VIX (INDEXCBOE:VIX) and other volatility measures.

The major indices closed lower fort he first time in five days on Friday, as, despite the better-than-expected non-farm payrolls number, bulls took some chips off the table ahead of the weekend break in response to the resurfacing coronavirus fears and the weak European economic releases. The Dow was down 277, or 0.9%, to 29,103, the Nasdaq lost 52, or 0.5%, to 9,521 while the S&P 500 fell by 18, or 0.5%, to 3,328. Decliners outnumbered advancing issues by an almost 3-to-1 ratio on the NYSE, where volume was slightly above average.

INDEXCBOE:VIX roller-coaster week

Even though the coronavirus outbreak continues in China and more and more countries are reporting confirmed cases, global risk assets had a very strong week. The mostly positive earnings surprises, the improving economic indicators, and China's trade-related flexibility boosted investor confidence, and the rumors regarding an effective treatment of the virus also helped the quick recovery. The U.S. tech sector clearly led the bull run, but the S&P 500 and the Dow Jones also caught up in the second half of the week, both hitting new all-time highs on Thursday. The long-term technical breakout that started in October seems to be well and alive. This is also the case with the longest bull market in history. This is further confirmed by the decrease in INDEXCBOE:VIX towards the end of the week.

The key economic releases were bullish for the second week in a row. This was especially the case with continued strength of the more forward-looking measures fueling the rally in stocks. The ISM manufacturing and non-manufacturing PMIs both beat expectations. They both hitit their highest levels since July and September respectively. Non-farm payrolls and the ADP payrolls number were both much-higher-than expected. The weekly number of new jobless claims remained very low, while factory orders and the IBD/TIPP economic optimism number improved as well. Even though the most important European indicators leaned bullish too, the fears of an abrupt Chinese slowdown weighed heavily on the euro, which, in turn, favored the dollar, propelling the Dollar Index (DXY) to a four-month high.

Economic data boosts stocks

The short-term technical picture improved significantly thanks to the quick and decisive recovery, and while the Dow has been threatening with a bearish short-term shift, the key trend indicators are still pointing higher across the board. The S&P 500, the Nasdaq, and the Dow are remain above their rising 200-day moving averages, and the benchmarks also closed the week above their steeply rising 50-day moving averages. While small-caps surged higher together with the broader market this week, the Russell 2000 continues to lag its large-cap peers, even as it recovered above its 50-day moving average after dipping below it last week. The Volatility Index (INDEXCBOE:VIX) had another hectic week and while it is well below the 20 level that it touched last week, it closed the week near 16, above its 50- and 200-day moving averages.

Market internals notably improved due to the recovery. However, some of the most reliable measures are showing negative divergences due to the slight weakness among small-caps. The Advance/Decline line, for example, remains below its recent bull market high. This is despite the fact that advancing issues outnumbered decliners by a 4-to-1 ratio on the NYSE. Advancing issues also outnumbered decliners by a 6-to-1 ratio on the Nasdaq. The average number of new 52-week highs increased on both exchanges. The number jumped to 118 on the NYSE and 92 on the Nasdaq. The number of new lows declined substantially in the meantime. That number fell to 43 on the NYSE and 48 on the Nasdaq. The percentage of stocks above the 200-day moving average bounced back together with the major indices. However, the number remains well below recent multi-year high, closing the week near the 66% level.

Stocks rise as INDEXCBOE:VIX decreases

Short interest declined somewhat on Wall Street. This happened even as the most-shorted issues underperformed the large-cap indices. We saw wild moves among them due to earnings and the coronavirus outbreak. Tesla’s (TSLA) epic short squeeze might have ended on Tuesday following a 50% spike in two sessions.The stock still sports a short interest of 17.5%, so volatility could remain very high in the coming weeks. Our previous pick, iRobot (IRBT) hit its highest level since October thanks to its bullish quarterly numbers. While a long-term bottom is still not confirmed, the stocks short interest of 49% could fuel a sustained rally. Microchip Technology (MCHP) also posted upbeat fourth-quarter earnings. The stock got close to its all-time high this week, with its days-to-cover (DTC) ratio still standing at 14.

We will have a slightly less busy week, in terms of economic releases. However, we will get key indicators from the consumer economy in the second half of the week. The Consumer Price Index (CPI) and retail sales will be out on Thursday and Friday respectively. The industrial production and the Michigan consumer sentiment number also being scheduled for the last session of the week. Fed Chair Jerome Powell will testify in Washington on Tuesday and Wednesday. So, Treasuries and the dollar could be in for a spike in volatility. It will be interesting to see how stocks start the week in light of Friday's dip.Indeed, the 'weekend risk' is higher than usual due to the epidemic. Stay tuned!