Yesterday, we saw a bit of a rally after a decline for eight consecutive weeks.
CNBC says, “The Dow and S&P 500 are up 4% and 3%, respectively, for the week. The Nasdaq is also up 2%. The Dow has also posted gains in the last four sessions.”
We could be seeing this surge for a few reasons: It could be a result the Federal Reserve’s minutes released from its last meeting, plus the first-quarter GDP report revision, both released Wednesday.
While we expected positive inflation data that might boost the market, we should be wary of the upward trend rather than jump at the first sign of a clearing storm.
And just this morning, the Personal Consumption Expenditures (PCE) report for April 2022 was released – the Federal Reserve’s preferred inflation gauge.
We saw that, from a year ago, the PCE rose 4.9% but this number excludes volatile food and energy prices that have been a major contributor to inflation running around a 40-year peak. Including food and energy, the PCE increased 6.3% in April. These are still-elevated levels that nonetheless indicate that price pressures could be easing a bit.
A True Bounce or a Bear Trap
The S&P 500 is bouncing off of the support range (where buyers have previously showed up to reverse the downward pressure) just above the key threshold where we would officially dip into bear-market territory. Remember, just last Friday the S&P 500 dropped below 20% in value from recent highs into bear-market territory with intraday trading and have been rallying ever since.
Now, there are a couple of things going on here and one of these things is dip buying. This has been a common theme to see in 2022 as the S&P 500 has been pulling back this year, we see traders coming in and buying. This has yet to be successful as when they come in and buy the dips, it has gone up a little bit just to drop to lower lows. And the question is, will this time be different?
Are we going to be able to break up and through this down trending resistance level or are we eventually going to break down and through this horizontal support level? Be sure to check out last night’s livestream as we look more into what is helping to boost the S&P 500 higher or if this is just a bear trap.
Good News for the Retail Sector
We have already pointed out that despite the negative reaction to retail reports over the last two weeks, consumers are still spending, which increases the chances for a continued market rally later this summer.
Thursday’s data from Macy’s (NYSE:M) and upgraded forecasts from Dollar Tree (NASDAQ:DLTR) and Dollar General (NYSE:DG) back up our view of the market. Consumers are not only spending on discount goods, but also on high-end products. Investors are using the news as an excuse to accumulate shares.
On the surface, this looks good, and it is certainly better than the alternative. However, we still urge caution. We don’t think this is the end of inflation-based volatility in the short term, so we aren’t going to recommend adding anything to the portfolio yet.
Did you catch our Monday livestream? We kicked off this week by examining which factors combine to push stocks higher after a big drop. (Hint: It has something to do with positive economic indicators and trader sentiment.)
While it may be premature to view these factors as an end to the bear market, we laid out a few scenarios that look promising. Click here to catch the recap.