While Snap’s warning that second-quarter performance was not tracking the company’s guidance sent equities — and more specifically technology stocks of companies reliant upon digital advertising — into an early Tuesday decline, and a number of lousy domestic macroeconomic data points added some weight, just look at what happened or was said around, or away from our marketplace Tuesday:
— 19 children, two adults killed in a Texas elementary school shooting.
— “Russia invaded Ukraine. This has shaken Europe to its core. The Russian invasion may turn out to be the beginning of World War III, and our civilization may not survive.”
Basing Pattern?
That said, we investors have seen the major large-cap equity indexes both rally sharply and sell off sharply of late without really going anywhere. I want you to take a look at this:
Of course, there are no promises here, and for this example, I speak of the short-to medium-term and not the longer-term trend. My question is this: Is the S&P 500 trying to develop a base at this level? Note that for most of mid-May, the index has gyrated wildly while moving sideways. This looks very similar to the period covering late February into early March. I don’t know about you, but as a trader 2022 has been tough, but March 2022 was one my best months in a multi-decade career.
Note that for both periods, as the index tried to form a base, Relative Strength hovered just above 30, indicating a heavily sold, but not quite technically oversold condition. Also note that down in the daily Moving Average Convergence Divergence (MACD) model, that in mid-March for the S&P 500, the 12-day exponential moving average (EMA) crossed above the 26-day EMA as the 9-day EMA returned to “zero.” From the March 14 close of 4,173 to the peak of March 29 (4,637), the S&P 500 ran 11.2%.
Now, again with no promises, take a look at the current setup. The RSI of the index is coming off of a reading just above 30, as the 12-day EMA has just “kissed” the 26 day EMA. The 9-day EMA also approaches the “zero” bound.
Many traders have been looking for what we refer to as a trade-able bottom. Heck, I have no idea if this is “The Bottom.” It probably is not if the U.S. economy goes into a second consecutive quarter of contraction or if it takes much longer for our monetary authorities to corral the consumer-level inflation that has been created by external factors as well as a legislature driven fiscal largesse that they themselves enabled. More on that this afternoon in the FOMC Minutes.
That said, a trade-able bottom does not have to be “The Bottom” and my friends, I think that we may be looking at such a setup.
Nights In White Satin
Nights in white satin
Never reaching the end
Letters I’ve written
Never meaning to send
Beauty I’d always missed
With these eyes before
Just what the truth is
I can’t say anymore
— Hayward David Justin (The Moody Blues), 1967
Full of Grace?
Breadth was poor on Tuesday. Losers beat winners at the NYSE by about 9 to 7, and at the Nasdaq market site by a more robust 5 to 2. Advancing volume took a 33.1% share of composite NYSE-listed trade, and a 20.4% share of that same metric for Nasdaq-listed stocks. Though aggregate trading volume remained rather light, it did increase from Monday for both NYSE and Nasdaq listings, which means that there was at least some mild professional distribution.
Spiraling Macro
On Tuesday, the S&P Global U.S. Manufacturing PMI flash for May printed at 57.5, still comfortably expansionary, but a three-month low nonetheless. The S&P Global U.S. Services PMI flash hit the tape at a less comfortably expansionary 53.5. This was a four-month low. Both of these results fell short of expectations, the services number significantly so.
On to Richmond. The Richmond Fed released their district specific manufacturing survey results on Tuesday. Richmond for those unaware, is arguably considered to be the second most important regional manufacturing survey released in the U.S. behind only the similar survey released monthly by the Philadelphia Fed. Last week, the Empire State (New York) Manufacturing Index printed in a deep state of contraction for May, followed by a Philly Fed that while not in contraction, badly disappointed at least at the headline. Richmond would follow suit.
Richmond printed at a contractionary -9, with deeply negative results for key components such as New Orders (-16), Shipments (-14), Backlog of Orders (-15), and Capacity Utilization (-11). In other words, three Federal Reserve regional districts have published their manufacturing survey results for May and all three badly missed. Kansas City steps to the plate this Thursday and Dallas next Tuesday. That’s agriculture and energy. Let’s see how that plays out.
Is it any surprise that April New Home Sales were badly disappointing on Tuesday? I mean April had already been a poor month for Housing Starts, and Existing Home Sales as mortgage applications have plummeted. For the month of April, headline U.S. New Home Sales dropped 16.6% from March, while each and every U.S. region also printed in decline. Some areas that had been very hot, have now cooled significantly. The U.S. South printed down 19.8% from March. The South has now printed in decline for three consecutive months, as have the Midwest and West.
Just an opinion, but I have been around for a while, and I have held titles with the word “economist” in it at three Wall Street firms. You make it harder for homeowners to sell their homes at what they think fair value is, and then you give those same folks a 25% haircut in what they thought they had socked away for retirement — and you will have slowed demand. That’s called a reverse wealth effect, and we are just scratching the surface. A lot of these folks haven’t even realized that their 401(k)s and IRAs have been “smashified” — and that their homes are not worth what they think.
On that note, how many companies have suggested this week and last that they might be overstaffed? We haven’t seen the labor market flip yet.
Slip Slidin’ Away
Slip slidin’ away
Slip slidin’ away
You know the nearer your destination
The more you’re slip slidin’ away
— Paul Simon (1975)
What’s Working?
Lithium is working. There’s not enough of it. Everyone is piling into Argentina in search of more.
Readers will see that LTHM has been volatile and now appears to have developed a cup with a double hitch handle (I just made that up) that comes bearing a $29.50 pivot. The stock approaches an overbought condition as per the daily MACD and Full Stochastics Oscillator. However, the RSI doesn’t quite see it that way. Should this pivot be taken and then held, my target moves from $31 to $36.
Note that in addition, the stock’s 50-day simple moving average (SMA) stands at the precipice of crossing over and above the stock’s 200-day SMA for a golden cross. That could happen today.
Economics (All Times Eastern)
07:00 – MBA Mortgage Applications (Weekly): Last -11.0% w/w.
08:30 – Durable Goods Orders (Apr): Expecting 0.6% m/m, Last 0.8% m/m.
08:30 – ex-Transportation (Apr): Expecting 0.6% m/m , Last 1.1% m/m.
08:30 – ex-Defense (Apr): Expecting 0.8% m/m, Last 1.2% m/m.
08:30 – Core Capital Goods (Apr): Expecting 0.4% m/m , Last 1.0% m/m.
10:30 – Oil Inventories (Weekly): Last -3.394M.
10:30 – Gasoline Stocks (Weekly): Last -4.779M.
The Fed (All Times Eastern)
12:15 – Speaker: Reserve Board Gov. Lael Brainard.
Today’s Earnings Highlights (Consensus EPS Expectations)
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