Santoli: Nvidia’s bounce could be a hint that the market has fallen enough for now

Published Thu, May 26 20221:26 PM EDTUpdated Thu, May 26 20221:57 PM EDT

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics. Dip-buyers have been humbled and mocked by the market for nearly five months. Is it time for those confidently "selling the rallies" to be challenged to prove their conviction? Perhaps. Even bear markets are not uniformly generous to those positioned for lower stock prices, with beguiling bounces interrupting the downtrend frequently. We'll see if the current rebound attempt builds into something of that sort. For now, it's enough to say the market has finally begun showing signs of having priced in a sufficiently negative Federal Reserve/growth outlook while displaying a bit more balance and differentiation in selecting relative winners and losers. As it is, the tape has managed to take advantage of some potential tailwinds cited last week: depressed investor sentiment and defensive fund-manager positioning S & P 500 flirted with 20% drop, as it has several times in history before stabilizing seven straight down weeks heading into this one was historically extreme positive historical patterns after May options expiration and ahead of Memorial Day possible traction for the S & P 500 near a cluster of downside targets from 3,800-3,900 ebbing Treasury yields provide stock-bond diversification and lifting some pressure from valuations month-end rebalancing into equities after they'd lagged bonds badly in May With it all, the S & P 500 remains fully within last week's wide range, more than 6% above Friday's intraday low and still about 1% below the high from eight days ago. It's another in a series of plausible bottom formations (the prior ones having failed before long). Arguably, it has a better chance of holding for a bit, due to the above reasons and the fact that the market's main enterprise this year — compressing valuations and absorbing tighter financial conditions — has gone further along with each passing week. Lots of tactical calls for any further rally in the S & P 500 being capped in the 4,200-4,300 area, and above there sit other barriers that had previously been tough to surmount (4,400 and 4,600), so as noted, bear markets lead to plenty of frustration and thwarted hopes in both directions. Retailers are rallying (after most were cut in half) on a spate of results showing decent top-line spending, frictional costs and some hits and misses depending on category. This supports the idea that recession talk is premature and the consumer cyclicals got too banged-up to keep falling in the short term. The market is able to rally following downbeat forecasts from SNAP . Nvidia reversing a steep reflex drop into a gain Thursday also lends credence to the "down enough for now" story. Credit markets had been showing greater concern about economic growth and default risk, another of those tighter financial conditions, but junk debt has lured in buyers at these levels to narrow spreads vs. Treasury. Not an all clear but a welcome sign. The response to Fed minutes was mostly "no new news," but it allowed for a notion to take hold that after a likely full percentage-point of hikes through July, some flexibility might emerge into September. The big picture remains one of suspense about how inflation tracks from here, and it remains a narrow, bumpy path to a "soft landing." Yet market-based expectations say the Fed might not have as much headroom for hikes as believed. The inherent uncertainty there probably caps risk assets at some level short of all-time highs, but there's plenty of room between here and there. For all the attention on faint signs of tech resilience, energy stocks remain undisputable leaders almost no matter what other groups are doing. Crude and natural gas are strong even with demand issues and China shutdown. The Energy Select Sector SPDR ETF (XLE) has accelerated higher, up 57% this year. The margin of outperformance is growing to rare extremes, one should expect switchbacks and tests, but this is perhaps a challenge to the confident calls that "peak inflation expectations" are firmly in the past. Market breadth is very strong, nearly 90% upside NYSE volume. Paired with Wednesday's 83%, this checks off a box for those asking if this rally is well supported (multiple 80% breadth days are a signal watched by some technicians gauging supply/demand for stocks). VIX easing lower, under 28, mimicking the agitated but not outright panicky range stocks are in. Morgan Stanley derivatives folks are saying it's common for bearish markets to see VIX peak within a couple months of a market peak and then trail off, so there is no real anomaly with how VIX has acted lately by these lights.