Corporate profits

Rebound erodes with corporate earnings

U.S. equity benchmarks slip from yesterday’s exuberant closing levels, observes Bill Baruc, President of BlueLineFutures.com.

There was a sense of negativity ahead of Fed Chairman Powell’s afternoon comments that he would crush the rally. He certainly didn’t seek to be supportive with comments such as “right now it looks like the natural (neutral) rate is well above 3.6%” and that “a soft landing will be difficult.” The neutral rate is becoming a hot topic among Fed committee members. Simply, it is the rate at which the policy is neither accommodative nor restrictive. Minneapolis Fed President Kashkari pointed to a neutral 2.5% rate, which no doubt brought some tailwinds. Although Powell’s 3.6% was inferred as hawkish, stock benchmarks rallied at the close as none of his comments came off as a real surprise.

Given the negativity from market participants ahead of his comments, this set the stage for something of a relief rally. The president confirmed that he was considering increases of 50 bases in June and July; the probability of such an outcome for June has increased from 86.2% to 91.3%. However, the performance of the Ten-year ticket (TNX) couldn’t ignore the overall aggressiveness and ended up ten basis points on the session at 2.995%.

This morning’s soft band comes after price action stalled back to 4100. Many view this critical level as a battleground given that it was established as a hard low in February and a hot spot. Monumental gamma balance ahead of Friday’s week three option expiration. Despite this positioning momentum, the leader on the decline was Target. Shares of the company plunged more than 20% after missing earnings by about 50% to $2.16 from the $3.06 expected. The company cited supply chain issues, higher fuel costs and less discretionary spending. Revenues have been battered, however, this breathes inflation and the higher cost of doing business in this environment. It happens a day later walmart (WMT) missed and fell 11.4% on its worst day of trading since 1987. Lowe’s (L) is also down about 3% after beating earnings this morning but missing revenue. Lowe’s is relying on the spring gardening season to maximize late first quarter revenue and the cooler weather certainly played a part in slowing the business. Home deposit (HD) broke yesterday, showing a strong quarter, but was mowed down by Walmart and broader market angst to post a gain of just 1.68%. On Target’s failure, the S&P fell from a high of 4077 just before the report, and with Walmart, the two certainly set the tone.

With price action reaching strong resistance at 4094.25-4101.75 and sliding we can only begin to recall what was a more bullish bias from Thursday’s close. The reason 4094.25-4101.75 was just a key level was because of the unfinished overhead at the May 6 spreads of 4119.75 and markets generally gravitate to cover these spreads. That said, we will now have a gap from yesterday’s close that lines up with previous major three-star resistance at 4079-4084.75 in the S&P500 (SPX) and 12,547-12,560 in the Nasdaq (NDX). On the downside, not much has changed; yesterday’s early key supports are still standing and being tested before the bell. Yesterday’s intraday lows shortly after the bell bring some middle ground.

The options on the June contract expired yesterday. Additionally, open interest and volume have shifted decisively towards July. The private API survey, released after the bell yesterday, showed massive surprise draws and brought very bullish tailwinds overnight. They printed -2.445mb crude, -5.102mb gasoline and +1.075mb distillates, while stockpiles at Cushing drew 3.071mb. Analyst expectations for today’s official report are +1.383mb Crude, -1.333mb Gasoline and -0.80mb Distillates. If such stocks in Cushing are confirmed, half of the rebound from the March low would disappear. Prior week inventories, released last Wednesday, jumped 8.487mb due to the SPR release and a lack of exports. If last night’s API data is confirmed, it would really show how stretched the market is and we find that very bullish.

Price action has rebounded from yesterday’s low of 108.96 in the July contract. This will line up with flat on the week at 108.63 to bring our second wave of major three star support. Although the expiring June contract has a resistance ceiling in the $115 range and we should be aware of what constitutes key resistance at 112.80, we consider July to be a bit more constructive. There is a pennant developing decisively above the previous highs.

The rebound in gold and silver is dissipating as quickly as it started. The 3.0% retest of the US 10-year note clearly weighed on the precious metals complex as well as the strength of the US dollar against the Chinese yuan. In the end, not much has changed, but we can clearly see what can revive the Complex and that’s exactly what we’ve pointed out. Much of the damage gold has suffered in recent weeks has been due to the weakness of the Chinese yuan amid high rates. The complex doesn’t seem to care about eroding business growth and fear of inflation, as seen across Walmart and Target, but in due course, we think gold will. Now it’s up to the technical landscape to hold and provide a constructive path to recovery.

Given the early sell off, gold needs to fight to hold the first and second key support and regain our momentum indicator at 1815. As for silver, constructively it has regained and is holding above- above previous low and rare four-star major support at 9:22-9:50 p.m.

Learn more about Bill Baruch at Blue Line Futures Contracts.