Santoli: Stocks brush off Fed worries and Microsoft concerns, but the rally may soon face a test

Published Thu, Jun 2 20221:23 PM EDTUpdated Thu, Jun 2 20222:05 PM EDT

This is the daily notebook of Mike Santoli, CNBC's senior markets commentator, with ideas about trends, stocks and market statistics. A third day of gentle oscillations in the indexes as last week's upward rip is digested. For a third straight day, too, the market tested the downside early. It then dismissed further decent excuses to continue lower, finding some traction. This time, those excuses were the modest Microsoft earnings warning and Federal Reserve Vice Chair Lael Brainard dashing hopes of a "pause" in the tightening path any time soon, while oil retains a firm tone. The S & P 500 has spent just about this entire week within the range traveled from close-to-close last Thursday-Friday, so no decisive moves are underway. The tape continues to benefit from the cushion built by the breadth of last week's rebound and a general sense that professional money feels underinvested, even if this ultimately is a counter-trend rally. As noted, starting middle of last week, it feels as if the conviction of the bears — who want to sell every rally — is due to be tested with something more than a weak cursory bounce, if nothing else. The chart makes clear why so many are targeting 4,250-4,300 as the area where this test might occur, between the 50-day average and the level the May rallies failed. The bulls are still leaning heavily on washed-out sentiment and defensive investor positioning as supports for at least a short-term bullish case. The NAAIM equity exposure index, tracking professional tactical investment advisors, is scarcely up off the recent multiyear low. JPMorgan reports that the net exposure to stocks of long-short hedge-fund clients is near the very bottom of the five-year range. Bank of America has long tracked the consensus equity-allocation recommendation of Wall Street strategists to use as a contrary indicator. It has dropped five straight months and is near — though not at — a buy signal, reaching levels associated with positive one-year S & P 500 returns more than 90% of the time, at least in the history of this sell-side indicator. This is all tactically helpful, though would not be of much help if financial conditions were forced much tighter in a hurry. "Don't fight the Fed" became a cliché for a reason, after all. Fair to say the market has largely priced the immediate interest-rate outlook fairly well (half-percent Fed hikes in June and July, more than 50% chance of a third in September). But if 10-year yields raced above 3% and/or credit spreads reversed to widen out again, the sentiment setup would lose its contrarian power. Amazon continues its conspicuous and forceful dayslong bounce. Several factors: The stock was mega-oversold, more so than the other huge-cap tech leaders. The cloud stocks and retail names have gotten some relief, allowing AMZN to play some catch-up along with its dual peer groups. Its 20-for-1 stock split becomes effective Friday , which shouldn't matter at all but does to some traders. And there's a yawning gap on the chart from its post-earnings dump that sits near the 50-day average and might be exerting some pull for a test of true supply/demand around that "get me even" level. Tesla and Nvidia are each also up, so there's a bit of a return to the old beta retail favorites going on. All wounded charts, all facing slowdown concerns to one degree or another, and all with a good deal to prove after a skein of underperformance. Market breadth is strong after two weak days: 75% upside volume. Nasdaq outperforming again even as bond yields hold near their recent highs, further undermining the overstated inverse relationship everyone thought was an ironclad rule several months ago. VIX giving way below 25, hitting a more-than-five-week low as the tape calms a bit and the mega-caps return to providing some ballast. This kind of release of tension is a positive until it reaches a level of inattentive complacency. Not there yet.