A light-news Tuesday gave the stock market the breathing room it needed to mount an aggressive rebound rally.
Whether the rally is of the short-lived “relief” variety remains to be seen. Today’s widespread bullish action came on the heels of a 5.8% drop in the S&P 500 last week – the second consecutive 5%-plus decline for the index, which is a rarity (more on that in a moment).
There wasn’t much in the way of news that would otherwise justify a powerful move upward. Existing-home sales for May dropped by 3.4% month-over-month to a seasonally adjusted annual rate of 5.41 million, which was just a tick higher than estimates for 5.40 million. Year-over-year, existing-home sales were down 8.6% – a stark contrast to the 45.5% YoY jump in May 2021. Median home prices were $407,600 in May, up from $395,000 in April.
“Sales of higher priced homes are holding up, but sales of homes under $500,000 are falling as higher interest rates price more buyers out of the market,” says Bill Adams, chief economist for Comerica Bank. “Higher income and wealth households have been less sensitive to the rise in rates so far, cushioning sales at the high end, but this segment will likely soften too with stocks in a bear market.”
Tops on Tuesday were energy stocks (+5.2%), led by Exxon Mobil (XOM, +6.2%) and Diamondback Energy (FANG, +8.2%). U.S. crude oil futures improved by 1.0%, to $110.65 per barrel, after Exxon CEO Darren Woods said he expected three to five years of tight oil markets.
Tesla (TSLA, +9.4%) – up by double-digits after CEO Elon Musk said the company’s biggest hurdle wasn’t competition, but supply-chain issues – also helped consumer discretionary stocks pull off a 2.9% return.
The Nasdaq Composite was out in front of a wide recovery, up 2.5% to 11.069. It was followed closely by the S&P 500 (+2.5% to 3,764) and Dow Jones Industrial Average (+2.2% to 30,530).
Other news in the stock market today:
- The small-cap Russell 2000 flew 1.7% higher to 1,694.
- Gold futures shed 0.1% to settle at $1,838.80 per ounce.
- Bitcoin had a whirlwind weekend, dipping below $18,000 at its nadir but recovering to $20,889.75, a 1.8% improvement from Friday afternoon’s level. (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m.)
- Palantir Technologies (PLTR) jumped 5.7% after BofA Securities analyst Mariana Perez Mora intiated coverage on the big data analytics stock with a Buy rating and a $13 price target, nearly 50% above today’s close at $8.71. “We see Palantir as a beneficiary of rapidly growing demand for AI-platforms in both commercial and government end-markets,” the analyst says. “Palantir’s dominant position in the AI-powered software market, differentiated end-to-end & highly-secure solutions and first mover advantages should support more than 30% annual revenue expansion and improving profits in the midterm.” Perez Moya also points to “increased urgency on modernizing military and intelligence capabilities,” which she believes will create significant opportunity for PLTR stock.
- Spirit Airlines (SAVE, +7.9%) got a lift today after JetBlue Airways (JBLU, -1.6%) raised the buyout offer for its discount airline peer by $2 per share to $33.50 per share. The offer includes $1.50 per share too cover part of the breakup fee for Frontier Group Holdings’ (ULCC, +1.6%) $2.9 billion bid for Spirit. JBLU also said it would be willing to commit to “significantly” more divestitures in order to gain regulatory approval. Spirit’s board is expected to jdiscuss and vote on the competing bids at a shareholder meeting scheduled for next Thursday, June 30. “Spirit needs some near-term relief from its over indebtedness and overcommitted position on flight equipment purchases, in our view” says CFRA Research analyst Colin Scarola, who maintained a Hold rating on SAVE. “The JBLU offer won’t provide that, but Frontier’s can, in our view, making it likely Spirit shareholders opt for the Frontier offer. At any rate, Spirit shares remain extremely high risk, in our view.”
Just How Long Will This Momentum Last?
So, about the market’s big back-to-back weekly dips …
Michael Reinking, senior market strategist for the New York Stock Exchange, said Friday that the S&P 500’s second consecutive week of 5%-plus declines – along with a few other signals – pointed to the possibility of a “tactical bounce,” and that bounce did indeed materialize today.
“The week is still young, so it is way too early to declare victory, but let’s take a look at just how rare back-to-back 5% declines are and what the return profile looks like going forward,” he said Monday.
Double-digit declines have happened only eight times since 1970 – including twice during the Great Financial Crisis and a three-week streak in 1987 that Reinking counts as two instances. The following week was up in 7 of 8 instances by an average of 2.6% (the lone exception was the day before Black Monday) … but what happens after that oversold bounce?
“Returns in the intermediate term are more mixed, with returns three months later only higher in 38% of instances,” he says. “However, that improves over time, with the average return one year later [roughly] 28%, with a median return of 18.5%.”
A long way of saying to bottle up today’s energy – there’s no guarantee it willl last.
It also means investors setting their portfolios up for the rest of the year must continue with a discriminating eye. As we near 2022’s midway point, we’re focused on the top opportunities for the coming year. We’ve recently explored potential targets in specific areas such as small caps and real estate investment trusts (REITs), but today we’re widening our scope to the entire market.
Read on as we look at the 15 best stocks from across the market that look poised for a sharp rebound after a difficult first six months.
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