Last week, the bulls were finally able to establish an advantage. Extreme levels of bearish sentiment suggested that most sellers already left the building. Buyer climbed out from under their desk and started to nibble.

This week will be important for bulls to hold these gains. There are a few key factors with regards to quarter end rebalancing that should keep traders guarded in terms of positive price action. 

The real test for the markets will come in a couple of weeks when we get Q2 earnings season results. 

The following is a recap of market action from last week and a look at potential market moving events that lie ahead. 

Market Recap: June 20-24

The stock market was finally able to string together a good week. The Nasdaq (+7.5%), S&P (+6.5%), and Dow Jones (+5.4%) all saw broad strength.

The market was able to brush aside a sobering testimony by Fed Chair Jerome Powell as buyers moved off the sidelines. Mr. Powell told Congress that it would be difficult for the central bank to engineer a soft alnding for the economy while it fights inflation.

On Tuesday, the Fed published a report that put the odds of a recession at slightly more than 50% over the next four quarters and approximately 66% in the next two years. News flash, we may already be in a recession as Q1 saw a decline and the Atlanta Fed projects Q2 GDP to be flat. A recession is technically when we have back-to-back quarters of contraction.

The Eurozone flash PMIs disappointed on Thursday with manufacturing and services both slumping to a 16-month low. The two measures remain in expansionary territory. Manufacturing output did contract for the first time in two years and looks set to accelerate in July. Price pressures remained elevated but there was some moderation in costs.

The market did not seem to mind the dour sentiment as it pressed higher. Bearish sentiment had reached extreme levels across numerous metrics and surveys. Cash levels were busting at the seems. This suggests that a lot of bad news was priced into stocks. Investors were ready to move off the sidelines and put money to work.

Better-than-expected earnings from Fedex (FDX) helped ease market worries. The company guided its FY23 EPS outlook above analyst expectations. This overshadowed a bottom line miss for the quarter. FDX shares broke above the 200-sma and pushed to its best levels since February. This marks a potential inflection point in trend for a company that is a key read on economic strength.

Markets were further boosted by a downward revision to the University of Michigan inflation metric. The final read of the survey saw long-term inflation expectations decline to 3.1% from 3.3%. It remains elevated but the revised number reflected an important trend of cooling inflation expectations in late June.

Finally, in a speech to BRIC nations, China’s President Xi Jinping called for further stimulus in his country. Xi stated, “We will step up macroeconomic policy adjustment, and adopt more forceful measures to deliver economic and social development goals to the whole year and mimimize the impact of COVID-19”. It is rare for public officials to mention economic targets directly. This raises the aspect of China stimulus in 2H22. The news further bolstered market sentiment.

The oversold conditions allowed for buyers to step back in and not worry about another fade. Leaders included Consumer Discretionary (+8.3%), Healthcare (+8.2%), Information Technology (+7.3%), Utilities (+7.2%), Telecom (+7.0%), Consumer Staples (+6.6%), Financials (+5.1%), Industrials (+4.2%), and Materials (+2.7%). Eneregy was the clear laggard as it declined -1.7 last week.

The million dollar question for the markets is whether bulls can continue to press their advantage.

Looking Ahead

The bulls showed some signs of life last week. The first hurdle will be to consolidate last week’s gains. If we see the Friday rally erased then it will be tough to get buyers to come back out of their shells.

If bulls can hold gains then we will see more buyers come off the sidelines. This would allow for us to push back toward 50 day moving averages across the three majors. This sets up as a key trend line for the markets.

It will be difficult for stocks to break meaningfully above and establish a new upward trend ahead of earnings season. There are a couple of important earnings this week (NKE, JEF, SGH, MU) that will provide investors insight into the health of corporations. But we will need to see the bulk of Q2 results and get commentary on the back half of 2022 for us to truly establish a new trend.

The most likely scenario for the market is to press higher on lower volume ahead of another three-day work week.

The PCE report on Thursday looms large but that likely sits in the favor of bulls as most participants have already factored in an aggressive Fed rate hike path. If we see PCE prices cool, then that should lead to further upside in stocks, assuming bulls were able to establish support in the early part of this week.

Key Support/Resistance Levels

The common theme to start the week is for the need to hold on and consolidate Friday’s gains. If bulls can accomplish this feat, then we start to edge higher for key tests of 50-sma trend levels. 

S&P 500 (ES U22)

  • Support– The first line of defense for the bulls sits at the 3880 area which has held early support to start the week. If this slips then we head back toward the Friday breakout area around 3820.
  • Resistance– The 20-day moving average sits at 3941. If we can breech this level than the psychological area of 4000 comes into focus. The big level for the week is 4055 which currently houses the key 50-day trend. 

Nasdaq (NQ U22)

  • Support– The futures are straddling the 20-sma (12150) to kick off the week. An inventory check for bulls around the 12K psyche level may be on tap. This would be a good test for buyers. If 12,000 fails to hold than we should be on alert for a test of the Friday breakout area around 12,750.
  • Resistance– An early rally will put the NQs 50-sma on the radar. This level is 12,519.

Dow Jones (YM U22)

  • Support– Another index that is looking to test its 20-sma (31,680) to kick off the week. The Dow has been holding above the 31,300 to kick off the week. If it dips below this level than the Friday breakout area at the 31,000 level sets up as the key support level. 
  • Resistance- The 20-sma sets up as the first hurdle for bulls. A push through that level will bring in the 50-sma (32,395) into focus. 
Four Stocks to Watch

Nike (NKE)– The sports shoe and apparel company will report Q4 earnings Monday after the close. The news will provide investors an update on the health of the consumer. Investors are concerned that inflationary pressures will lead to softer demand. Recent channel checks from names like Dicks Sporting Goods (DKS) suggest softer demand in North America. Participants remain worried that slowdowns due to the pandemic and political backlash in China will lead to higher inventories. Keep a close eye on the FY23 revenue growth outlook which analysts project to be approximately 12%. Watch for potential FX headwinds as the strong dollar likely impacted Q2 performance and margins. NKE provided a pleasant surprise to investors last quarter, beating top and bottom-line expectations. But recessionary fears have led the stock lower. NKE is down 20% since the Q3 report. $100 is setting up as key psychological support for the stock.

Micron (MU)– The storage chip maker will report Q3 results Thursday after the close. Shares are down approximately 13% this month despite the company offering an upbeat outlook at its Investor Day in early June. Wells Fargo reported data points continue to trend in a negative direction. Memory industry updates, sentiment, and pricing trends have softened considerably in the last month with weaker PC handsets a key drag. Data center servers continue to be a primary revenue driver. Look for updates on its recently announced partnership expansion with Semiconductor giant Taiwan Semi (TSM). Sentiment remains dour as evident by an RSI of 38 but the stock is cheap, trading at 4.7x earnings and 1.37x book. The stock is fighting to hold support at the $55 area.

Jefferies (JEF)– The bank will report earnings Monday after the close. JEF serves as a harbinger for banks as it provides its Investment Bank results approximately two weeks before the full onslaught of bank earnings season. Investors continue to digest the bank stress test results from last Thursday. In general, they were positive as the industry remains well-capitalized. There are some concerns that the current environment will force banks to rein in capital return plans, especially on the stock buyback front. We will get the capital return plans from banks. The JEF earnings and capital return plans will push the industry front and center on Tuesday.

Coindesk (COIN)– This stock is viewed as a proxy on bitcoin. Shares have been under tremendous pressure with shares down 75% YTD. The stock has settled in a range of $40-60 the past couple of weeks. This will be a key read for traders as we try and assess the risk appetite for investors this week. The stock was downgraded from Neutral to Sell by Goldman Sachs this morning which will add to the volatility. The firm cut its price target to $45 from $70 as they believe current crypto asset levels and trading volume imply further degradation of the revenue base. 

Four Stories to Watch

OPEC Meeting– Energy was the only sector to finish in the red last week as it declined -1.7%. Crude Oil fell -2.3% over that period. Top S&P 500 losers included DVN (-15%), MRO (-14%), PSX (-13%), APA (-13%), and VLO (-12%). Growth concerns were at play as the calls for recession continued to increase. Investors are closely watching demand trends as China starts to come back online from COVID shutdowns. At its June 2 meeting the group announced it would increase its production by 648,000 barrels day compared to the 432,000 it had been running. Unfortunately, the cartel continues to have issues meeting its current output goals as recent reports from S&P Global Commodity Insights suggest it underproduced its output target by 2.616 million barrels in May. The OPEC meeting comes ahead of next month’s visit to the region by President Biden.

PCE Prices- Thursday the market will receive a slew of important economic data points. Perhaps the most influential report will be the May Personal Consumption Expenditure (PCE) which is the Fed’s preferred inflation gauge. Core PCE is expected to increase 4.8% after a 4.9% rise in April. The April figure cooled from the 5.2% increase in March. Markets received a boost from the dip in inflation sentiment data in Friday’s revision to the University of Michigan inflation component as well as some positive tones around pricing pressures in the preliminary PMI surveys. A dip in PCE would suggest some further downward pressure on inflation.

G-7 Meetings– The Group meets early this week. The key back drop remains the Russia/Ukraine War and how the group will secure energy independence as members move away from Russian commodities. Another important aspect is how the United States could address tariffs with China. The Biden Administration has stressed that it does not want to move unilaterally on China trade talks. If the group provides a united front, then it could open the door for some tariff relief. Two influences on runaway inflation has been self-imposed with Russia’s invasion and China geopolitics. Market participants will want to see if any progress can be made on these fronts.

Rebalance– We have the quarter-end rebalance coming this week. This is when portfolio managers are forced to buy asset classes to meet projected goals of asset allocation. J.P. Morgan’s market strategist Marco Kolanovic suggests this could lead to further buying in equities following aggressive selling pressure in Q2. The S&P 500 rallied 7% at the end of Q1 and rallied 7% in the last week of May. We could see further buying in equities as we head into the final week of Q2 trade. The move would likely come on lighter volume as we prepare for another three day holiday weekend.