Santoli: Target, Walmart’s quarterly earnings drag shares, but there’s a bright spot buried in the results

Published Wed, May 18 202212:55 PM EDTUpdated Wed, May 18 20222:07 PM EDT

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics. The market offering a good example of why the burden of proof is high on any relief rallies when the indexes are in a defined downtrend, rolling over back toward Friday's opening level as another bout of macro friction abrades investors' hopes for a cleaner rebound. As noted here, last week's bounce off the lows checked off a few boxes you'd want in trying to distinguish a decent trading low — a flush lower, sentiment depressed, S & P 500 tagging a potentially significant -19.9% total loss level, registering 90% upside NYSE volume Friday. We never got a truly comprehensive oversold reading. Perhaps the fact that both bulls and bears felt a good bounce made sense is a reason the market isn't immediately cooperating with this tactical consensus. The 10-day chart shows the S & P at risk of reentering that zone of Thursday's low. It's a bit soon for a formal "retest," but we'll see if it gets there. The prior range was roughly 4,100 to 4,400, so this is an uphill proposition in any case. As noted many times, most of the market's project this year has been to reel in elevated equity valuations as profit growth slows and the Federal Reserve hustles to normalize monetary policy. Much has been accomplished so far, as this UBS chart showing the S & P 500 forward valuation compressing during pullbacks. If this is a typical nonrecessionary midcycle valuation adjustment, then it's in the zone of how far these things have tended to go. Real meltdowns occur when earnings are also collapsing, and recessions change the equation radically. The fact that we started at particularly high absolute valuations and yields are up quite a bit and the one-time bellwether Nasdaq 100 has still only just undone its pandemic-era surge in aggregate price-earnings ratio means a bull here on valuation is perhaps hoping the pendulum stops before swinging all the way in the opposite direction, in the zone of "fair" rather than "cheap" levels. Sentiment continues to be one of the better contrarian bullish inputs. Bank of America fund manager survey showing high cash levels . Here are the pros in the Investors Intelligence survey. In a bear market, the threshold for concluding that sentiment is negative enough to support a lasting rebound becomes more demanding, but it's probably not far away – if not there yet. The nasty Target miss following Walmart's clunker and the severe market reactions are destabilizing in a couple ways. It suggests the supply-chain/energy-cost pressures will corrode consumer-company margins for a while longer. Further, the fact that WMT and TGT react with their worst days since the 1987 market crash shows a level of single-stock vulnerability that investors have to apply across their portfolio (much as the dramatic collapses in NFLX and FB did for growth-stock managers). There is arguably good macro news embedded in the retail disasters, though. High inventories and overstaffing means disinflation to come on goods and wages. Too soon for the market to celebrate this, but it helps things in terms of what the Fed wants to see. Market reaction to Fed Chair Jerome Powell giving the " tough love " line yesterday was a net positive, with him suggesting the bond market was now aligned with the Fed's own policy outlook. On the bright side, it's good that the market has arrived at that place of pricing in at least a percentage-point of rate hikes by the end of July. On the other hand, that still means a percentage-point of tightening over two months almost regardless of what numbers come along the way. Treasury yields easing with the equity volatility today is a slight plus. Support for the idea that yields are unlikely to race much higher from here (cap near 3.2% on the 10-year?) and maybe hinting at value having emerged in higher-quality fixed-income. Market breadth is ugly, close to a 90% downside day, which the textbooks say effectively undoes the positive signal from Friday's 90% upside day. Options expiration Friday causes lots of tactical battles around successively lower round-number index and ETF-price levels. Of course, expiration weeks have been known to serve as inflation points in recent months. Noteworthy but hard to bet on. Credit is underperforming, junk spreads wider. It's touch and go, still not stressed enough for the Fed to change course but starting to demand attention. The Fed wants financial conditions to tighten but not in a severe, messy way. VIX back toward 30, spent a lot of time here lately, neither high enough to suggest the fever was peaking and breaking, also not low enough to suggest stability and embolden volatility-sensitive systematic investors to load up on equity exposure.