The S&P 500 (SPX) opened sharply lower on Thursday as traders fretted about the economy, interest rates, and inflation, states Jon Markman, editor of Strategic Advantage.

At 3:00 pm, it seemed that all was lost. The benchmark index traded all the way down to 3,858.90, a single point below the critical support level I wrote about yesterday at 3,860. And that is where the frantic short covering began. The index closed at 3,930, a loss of only 0.1%.

There are good rallies and bad ones. The rally late Thursday was a bad one. The gain was all about bears covering short positions at a key support level. Buyers continued to stand aside.

Bulls need a victory and, perhaps surprisingly, they are in a position to grab one. A sustained rally through 3,950 early today would force bears to cover short positions. Given that stocks have been declining for almost seven weeks, there is an outside chance that bears will concede a rally all the way to 4,115, the next overhead resistance level.

Don’t get too excited, though. Even a rally of that magnitude, around 4.5%, would leave bears in control of the tape. If there is no rally today, I suspect that the S&P 500 will end the week very near 3,950.

The Upshot

The Dow (DOW) dropped 0.3% to 31,730.3, its sixth consecutive fall. The Nasdaq (NDX) edged 0.1% higher to 11,370.96. Utilities, tech, and financials led decliners, while health was the biggest gainer.

Breadth favored advancers four-three, and there were 46 new highs vs 3,226 new lows. The biggest stocks on the new high list were pretty small: H&R Block (HRB), Bottomline Tech (EPAY), Huron Consulting Group (HURN), and TORM (TRMD).

Crude Oil (CL=F) futures added $1.11 to $106.82 per barrel....The US 10-Year Note (TNX) yield slumped by 10.4 basis points to 2.82%. Gold (GC=F) fell $30.90 to $1,822.80 per troy ounce.

The highlights of Thursday's data schedule were a small increase in initial jobless claims and a 0.5% gain in April producer prices.

Initial jobless claims rose by 1,000 to 203,000 in the week ended May seventh, while the four-week moving average rose by 4,250 to 192,750, a fifth straight increase.

The US producer price index increased by 0.5% in April, compared with a 1.6% jump in March, in line with expectations in a survey compiled by Bloomberg. Excluding food and energy, the core PPI climbed by 0.4%, lagging the 0.7% gain expected. Core PPI grew by 1.2% in March.

"This morning's PPI fell short of expectations for a clear downward trend in price pressures," Stifel Chief Economist Lindsey Piegza said in a note. Nothing in yesterday's CPI or today's PPI report suggests the Federal Open Market Committee "will deviate from the implied increase of 50bps on June 15, although some are beginning to reconsider the possibility of a 75bps increase."

In company news, Tapestry (TPR) cut its full-year financial guidance due to headwinds from recent Covid-19 lockdowns in China. But pricing gains and strong demand lifted the Coach owner's fiscal third-quarter sales above Wall Street's estimates. Tapestry shares surged 15.5%.

Apple (AAPL) fell 2.7%, with Thursday's decline eroding around $120 billion of its prior market value and allowing Saudi Aramco to overtake the iPhone producer as the world's most valuable company.

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