Last week, the market showed some signs of life. The Dow surged 6.2% to halt a streak of 8 weeks of declines. It was the longest weekly losing streak for the Dow in 90 years. 

The Dow trailed the S&P and the Nasdaq which rallied +6.6% and +6.8%, respectively.

Most of the rally came on Thursday and Friday, led by a reversal in the retail names as earnings reports came in mixed. The move came on lighter holiday volume which will lead to questions about the viability of the gains. 

There was a notable change in tenor. The price action around Dick’s Sporting Goods (DKS) and Nvidia (NVDA) provided signals of seller exhaustion.

DKS cut its FY23 guidance well below consensus. The stock traded down by as much as 17% Wednesday in the pre-market. It reversed and found upside momentum to close 9.7% higher on the day of its report. 

NVDA reported better-than-expected Q1 earnings that afternoon. However, the premium semiconductor play warned that Q2 revenue would fall short of expectations. The stock fell 10% in after-hours trade but recovered those losses and closed 5% higher on Thursday.

Both stocks had fallen 50%+ from all-time highs set in the Fall of 2021. The moves hint at seller exhaustion. 

The question now is whether the market has found a bottom, with the Nasdaq now 25% below its peak, the S&P off 13%, and the Dow down 10%. Bulls will need to hold support levels to maintain upside momentum as downward trend line resistance will test buyers’ appetites.

Sector Performance

Last week, the top-performing sector was Energy which rose +5.1%. Energy continues to be a leading sector for the markets and a place where buyers forage first. Consumer Staples and Financials both increased +3.8%. Utilities rose +3.2% followed by Industrials (+2.2%), Information Technology (+2.0%), Materials (+1.7%), Materials (+1.7%), and Consumer Discretionary (+0.8%). 

The only sector to close down for the week was Telecom (-1.1%) which saw constituents come under pressure following an earnings warning from Snapchat owner Snap (SNAP).

Market Thoughts

The critical question for the market is whether it can hold last week’s gains. The crux of the last week’s rally came on Thursday and Friday on lighter volume trade. 

It is not uncommon for the markets to rally in this type of environment. The general thought is that junior players are on the desk while the primary decision-makers break early for vacations. Therefore, some of the major decisions to be made on selling a position are delayed until senior management returns to the desk.

We are seeing some traders take advantage of the move last week to bank some early profits. This sets up a key test of support in the indices. 

These are the levels that bulls need to defend and hold for the markets to avoid a more aggressive reversal:

  • S&P (ES M22 contract)- 4,050
  • Nasdaq (MQ M22 contract)- 12,000
  • Dow (YM M22 contract)- 32,000

If bulls can hold indices above these levels and consolidate gains, then it will set up as a potential launching area to break through longer-term downward trends on the charts. 

Four Key Stories for the Day

  • EU to ban 90% of Russian oil imports- The timing of the move comes as a small surprise. A ban on Russian oil imports was expected to be a hot topic at the Eurogroup meetings but most thought the group would kick the can down the road. Oil is rallying on the announcement as supplies will dwindle. This will be a positive for U.S. Oil & Gas plays. The higher prices may lead to some profit taking in the retail sector following last week’s bounce.
  • Biden-Powell Summit- President Joe Biden will meet with Fed Chair Jerome Powell today. The two leaders will discuss the state of the economy and inflation. President Biden presented his views in a Wall Street Journal He had little interest in “meddling” with the Fed and stated that his Administration would continue to take steps to ease the pain for the consumer. It is unlikely any meaningful announcements will emanate from the meeting, but markets will be on edge awaiting headlines. 
  • Fed Governor Waller Hawkish Comments- Fed Governor Christopher Waller stated support for 50 basis point rate hikes at meetings until we see inflation come down closer to the Fed’s 2% target. Part of last week’s rally was due to the idea that the Fed could hike rates 100 bps at the next two meetings and then take a pause. These remarks are aiding the early profit-taking. 
  • Strength in China- The Shanghai Composite rose 1.2% overnight. The market was aided by better-than-expected Manufacturing and Service PMIs. Both surveys remained in contraction territory but showed improvement from the April read as recent policies to smooth logistics and supply chain issues take hold. Chinese officials stated they would take steps on Wednesday to reopen cities. This is a major positive for the markets as supply chain constraints have been a major factor in higher inflation.

Four Stocks/ETFs to Watch

  • Amazon (AMZN)- This week is the last chance for investors to buy AMZN before the 20-for-1 stock split becomes effective on June 6. Amazon rallied 11% last week but is still down 38% from its 52-week highs and trades at its lowest valuation in seven years. The stock is attempting to break above resistance at the $2300 level.
  • Lululemon (LULU)- The sports apparel maker is set to report results Thursday after the close. The company is expected to be a winner in what has been a volatile earnings period for the retail sector. The high-end consumer has proven, once again, to be more insulated against rising prices. Morgan Stanley upgraded the name ahead of its report as it sees LULU as a “compelling opportunity” as it trades at a discounted valuation compared to historical levels. The stock is testing downward trend line resistance with the May high of $316 setting up as a major level. 
  • SVF Investment Corp 3 (SVFC)- SPACs have been a horrible place to park money over the past 18 months. This one is interesting given the current environment. SVFC meets this week to vote on taking Symbiotic public. Symbiotic is an automation technology company involved in supply chain management. The disruptive innovator already counts Walmart (WMT), Albertsons (ACI), and C&S Wholesale as clients. The company has $5 billion in contracted order backlog on its books. WMT and Softbank (SFTBY) are major backers.
  • com (CRM)- The Dow Component will post earnings tonight after the close. Megacap Growth (MGK) was a key driver of market performance last week. CRMs results and commentary will be closely followed by the markets. There are concerns around the pull-forward of front office demand during COVID has morphed into fears of a recession that could put growth and margin targets at risk. The stock is down 47% from its 52-week highs. It has been showing signs of bottoming in this $155-165 area. Investors will want to see a breakout above resistance if the company is able to surprise this afternoon.