Precipitous and indiscriminate selling returned yesterday, and the S&P 500 (SPX) gave back its entire three-day rebound, observes Bill Baruch, president of

Of course, the failure came right at a critical technical impasse, but the one-two punch of Target (TGT) and Walmart (WMT) earnings and Fed Chair Powell’s 3.6% neutral rate comments were too much for markets to withstand. Selling overnight has retested Thursday’s low in both the S&P 500 (SPX) and Nasdaq (NDX). Remember, these levels align with a 20% correction for the S&P and a 50% retracement of the whole pandemic move in the Nasdaq. Whereas the S&P and Nasdaq have not yet made a new swing low, the Dow (DOW) has, now correcting 16%. The more concentrated blue-chip index has faced steep selling in companies that may have been hideouts to avoid higher beta names. The Dow is a price-weighted index, so the larger the share price, the larger the weighting. Three of the four top holdings, United Healthcare Group (UNH), Home Depot (HD), and Microsoft (MSFT), were down at least 4% yesterday. What this tells us is the selling has been just that, precipitous and indiscriminate.

We are also watching credit spreads. In yesterday’s Midday Market Minute, we noted the Treasury complex is responding to weakness and yields are coming in. While this is happening, yields on corporate debt are diverging. Two closely watched ETFs are the iShares High-Yield Corporate Bond ETF (HYG) and the SPDR Bloomberg High-Yield Bond ETF (JNK). Each did not enjoy Tuesday’s strength in stocks and yesterday they fell sharply to new lows. The lower the price, the higher the yields. This means credit spreads are beginning to blow out. This is one very larger corner of the market that will catch the Federal Reserve’s attention. If they were ever to pivot policy at any point, this could be a leading indicator.

Philly Fed Manufacturing, fresh for May, missed expectations this morning at 2.6 versus 16.0 expected and down from 17.6 in April. However, it did not fall into contraction like the NY Empire State read did on Monday. Initial Jobless Claims came in higher than the new benchmark 200k at 218k, but Continuing Claims trended lower for the sixth straight week.

US equity benchmarks were whacked yesterday and saw added selling overnight. As noted above, the S&P and NQ have so far held last Thursday’s low, which align with big levels of support. We will continue to view these as rare major four-star levels at 3802-3846 and 11,689-11,698, but remember the more they are tested, the weaker they can become. There are positives to focus on this morning, the ten-year yield has fallen to a three-week low at 2.78% and Dr. Copper is higher by more than 1% on the session. Remember, Dr. Copper has recently given us overnight signals on highs and lows that stocks have followed. In fact, there is a nice inverse head and shoulders in Copper developing from May ninth. Given the lower action overnight, there are gaps overhead from yesterday’s settlement and this aligns to bring major three-star resistance in the S&P at 3922.75-3930.25 and 11,935-11,947 in the NQ. Anything less than trading out above these levels will encourage selling to again take hold.

Crude Oil (CL=F) slipped sharply this morning on the news that China is buying Russian Oil for its strategic reserves. Remember, markets are pricing in less Russian Oil in the market and this theoretically adds some back. The news had more weight given the broader risk-off dynamics and recessionary fears with $4.00 front-month Gasoline trading yesterday. Russian Oil is grabbing more headlines this morning as their Energy Minister Novak said production is set to rebound in May. Furthermore, there is a belief circulating that EU sanctions will leave the door open for some Russian Oil to be exported. Traders want to keep a pulse on that broader risk-off dynamic and if things improve it is likely to help lift Crude and vice versa.

We remain overall bullish in bias, with a tone of caution for this exact reason; the environment is volatile and large swings are to be expected. A sharp move lower quickly went through major three-star support at 104.40-10463 and pinged that at 103.14 with a low of 103.24 before rebounding.

Gold (GC=F) and Silver (SI=F) are responding to US Dollar weakness and broad Treasury strength. This is the moment in which they must respond, a failure to do so would signal they are acting no more than a simple risk asset. The Chinese Yuan has rebounded by 0.55% against the US Dollar today and this has encouraged a broader movement across the metals complex with Copper and Platinum both rebounding nicely. The last leg this morning came after Philly Fed Manufacturing and Initial Jobless Claims both missed, but surprisingly enough, Copper and Platinum rallied alongside Gold and Silver.

Both Gold and Silver held onto first levels of support overnight and were able to use this as a base for this morning’s strength. Still, they must now clear strong overhead resistance and Gold has begun sticking its nose above major three-star resistance at 1829.8-1836.5.

Learn more about Bill Baruch at Blue Line Futures.