The Onset of Seller's Exhaustion? | Morning Express 05/26/22
Posted: May 26, 2022, 8:43 a.m.
E-mini S&P (June) / NQ (June)
S&P, yesterday’s close: Settled at 3976.75, up 36.25
NQ, yesterday’s close: 11,942.25, up 171.25
Fundamentals:
U.S. equity benchmarks finished strongly on the heels of the FOMC Minutes but fell back after NVDA lowered guidance for the current quarter. The company beat Q1 estimates and hit record revenue for Data Center and Gaming. However, the market cares less about what these companies have done and much more about what they will do. This is the environment we are in and by some consideration bringing down lofty future expectations paves the way for positive surprises. The good companies had a solid quarter, but just about all have lowered future estimates. NVDA, like many, blamed these revisions on supply constraints, the Russian war, and China’s lockdowns. At some point, the story gets stale, which is also a positive. Apple said at its earnings release last month it expects as much as an $8 billion hit to revenue in the current quarter due to, you guessed it, supply constraints (chips) and China’s lockdowns. Apple has made headlines recently, realizing this potential loss of revenue, and the stock is down more than 1% ahead of the bell. Alphabet is another. They reported underwhelming earnings a month ago but were smacked again due to a material revision from SNAP. Put this in perspective, Alphabet is a $1.4 trillion company, and SNAP is a $24 billion company. We are not seeing new negative news; it’s the same narratives packaged differently. Therefore, we believe the market is at the onset of seller’s exhaustion.
With that said, indices battled to hold the exact support levels highlighted in yesterday’s post-bell Midday Market Minute. As we head into the back half of the week, we are watching Apple, Alphabet, and NVDA extremely close. These are the first, fourth, and eighth largest companies by market cap in the S&P 500. If they stop going down on bad news and finish the week strongly, we believe it will speak volumes about such seller’s exhaustion.
Developing this morning, Alibaba crushed earnings expectations and helped the S&P briefly stick its nose above 4000 ahead of the opening bell. The first revision of Q1 GDP was actually worse than expected at -1.5% versus 1.3% on the first look. Initial Jobless Claims beat expectations at 210k, but Continuing Claims broke a streak of six consecutive weeks of trending lower.
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NQ (June)
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Crude Oil (July)
Yesterday’s close: Settled at 110.33, up 0.56
Fundamentals: Crude Oil has continued a consolidation at the upper end of its range and just below significant resistance. Yesterday’s weekly EIA inventory report was not bullish, but Crude’s ability to respond to support and battle back on the session speaks to how fundamentally tight this market is, bullish. Additionally, the inability to yet retreat sharply from overhead resistance also speaks to how the underlying fundamentals remain extremely bullish. Such a tight supply-demand landscape is something we have been talking about since mid-2021 and the spare capacity narrative, or lack thereof, is front and center. Prices were boosted overnight when the Saud Aramco CEO warned of the lack of spare capacity.
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Gold (June) / Silver (July)
Gold, yesterday’s close: Settled at 1852.5, down 18.9
Silver, yesterday’s close: Settled at 21.87, down 0.193
Fundamentals: Gold and Silver are off session highs, and if you are purely watching futures markets such as the U.S. Dollar Index (flat) and Treasuries (firm) you may be wondering why. The explanation is easy and clear, the U.S. Dollar surged overnight against a weakening Chinese Yuan, accounting for a two-day move of 1.6%. Although Gold and Silver commonly have moves of 2% or more, this is a large swing for the currency complex. This morning, the second look at Q1 GDP was revised worse, a contraction of 1.5% versus -1.3%. The GDP read, coupled with yesterday’s Durable Goods Orders miss and a poor New Home Sales earlier this week, is something that could help buoy the wave weakness in the face of the elephant in the room, the Chinese Yuan. Tomorrow, we do get the Fed’s preferred inflation indicator, Core PCE.
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