EB Daily Market Report - Tuesday, June 7, 2022

Executive Market Summary

• Futures were lower overnight and our major indices gapped lower
• Yesterday, we saw higher opening gaps and selling throughout the day; today, it's the opposite as were weak out of the gate, but buying has been strong since
• Energy (XLE, +2.68%) is today's (and 2022's) big winner, led higher by a very strong coal ($DWCCOA, +5.90%) group
• Industrials (XLI, +1.01%) and technology (XLK, +0.99%) are also having solid sessions
• Consumer discretionary (XLY, -0.56%) is the weakest sector and the only sector in negative territory
• Broadline retail ($DJUSRB, -1.75%) is a drag on discretionary stocks as Target (TGT, -3.80%) issued a profit warning as it plans to rid itself of unwanted inventory
• Crude oil ($WTIC, +0.54%) remains just beneath $120 per barrel
• The 10-year treasury yield ($TNX) is down 7 basis points, no doubt helping stocks to sustain their bullish intraday behavior
• The S&P 500 is seeing strength in a number of energy-related companies, led by Apache Corp's (APA) nearly 7% gain

Market Outlook

Let's take an in-depth look at the S&P 500, along with my favorite sustainability ratio - consumer discretionary (XLY) vs. consumer staples (XLP):

I see both remaining in down channels at this point in time. The blue-dotted directional lines provide us short-term upside potential, but the longer prices remain strong, the more downside that we need to be aware of. On Friday, we get the latest CPI data for May. The Core CPI number expected is +0.7%. If that number is hotter than expected, we could see the overall market roll over in a big way. If the number is better than expected, then let's watch two things - first, the upper downtrend lines in the chart above and the rotation between growth stocks and value stocks. Here's the latest chart on the key relative ratios to watch:

I'm just not seeing anything yet that has me running to my broker to buy growth stocks. Wall Street has yet to fully turn its attention to this area of the market. And if Wall Street's not buying, then neither am I.

Sector/Industry Focus

If you've followed me over the years, you know I'd much rather be bullish about the market than bearish. Regularly shorting stocks is simply not in my DNA. But being long in the teeth of a cyclical bear market isn't a great strategy either.

Do you believe we're rallying temporarily and will be heading lower sooner rather than later? If so, and you plan to short stocks, I'd be looking at industries that have shown short-term strength, but intermediate-term or long-term weakness. There are two industry charts that, on a relative basis, look like they're poised to roll over - both in consumer discretionary:

Home Improvement Retailers ($DJUSHI):

Home improvement stocks were hammered during the four-month period that ended in March. Since then we've seen the DJUSHI perform quite well on a relative basis, but the group appears to be rolling over again. A close beneath the 20-day EMA could be quite problematic, so keep an eye on that.

Home Construction ($DJUSHB):

The good news here is that the PPO has turned positive. Therefore, if the DJUSHB can close back above the 1265 level, I'd be a little less bearish here. If it continues to roll over, though, I could see another quick decline to 1100. Relative weakness appears to be resuming. If we see that continue, then look for lower prices ahead in many home construction stocks.

ChartLists/Strategies

I don't typically provide bearish ChartLists from which to short - unless I believe we're in a secular bear market. I don't believe we're in one of those currently. Therefore, we haven't spent time developing bearish ChartLists. However, if I look at stocks within the two industry groups mentioned above, I definitely see potential short candidates. Here are two, with potential trading strategies to consider:

RH (home improvement):

On the daily chart, RH has had a period of strength, rising all the way up to challenge its 50-day SMA, which it has not definitively closed above since late-summer 2021. 319 also provided solid price support for two months, before a heavy volume breakdown. That level is now key price resistance and RH yesterday traded as high as 314.55. Therefore, shorting at the current level and again closer to 319 makes sense to me. Consider any close above 320 as reason to close out the position, while there's a significant possibility RH could return to its May low near 240. That presents a very solid reward-to-risk opportunity on the short side.

PHM (home construction):

On PHM, I'm most interested in this 20-week EMA test, where PHM has been failing throughout 2021. There's also solid price resistance just above 45 after a big breakdown there in March. Key support resides in the 39-40 area. So I'd consider shorting at the current price and again at 45. I'd exit on any close above 46, while looking for 40 as my profit target. This is another solid reward-to-risk trade on the short side.

Earnings Reports

Here are the key earnings reports for the next two days, featuring stocks with market caps of more than $10 billion. I also include several companies with market caps below $10 billion. Finally, any portfolio stocks that will be reporting results are highlighted in BOLD. If you decide to hold a stock into earnings, please understand the significant short-term risk that you are taking. Please be sure to check for earnings dates for any companies you own or are considering owning.

Tuesday, June 7:

SJM, CASY, GWRE, SMAR, VRNT, ASO, UNFI, CBRL, PLAY, GIII

Wednesday, June 8:

BF/B, CPB, FIVE, PAGS, THO, ABM, OLLI, OXM

Economic Reports

None

Happy trading!

Tom