The deluge of retailer earnings continued Wednesday, and this time the news was a catalyst for bears to sell, states Jon Markman, editor of Strategic Advantage.

The benchmark S&P 500 (SPX) smashed 4% lower, at 3,923. The decline began after Target (TGT) released second-quarter financial results. The retail giant followed Walmart (WMT) yesterday with weak growth and a dour forecast for the rest of the year. Both firms blamed surging freight costs and a shift in consumer spending away from higher-margin discretionary items like TVs.

Investment sentiment is veering toward recession. Bears see opportunity and they are now pressing every advantage. The goal is to take out the recent low for the S&P 500 at 3,860. If they can do that this week, the next downside objective is 3,728, the breakout level from December 2020.

The bulls are in trouble.

Weak corporate results remind investors a recession is looming. Stronger economic reports shift the focus to the likelihood of more rate increases from the Federal Reserve. In this environment, every rally is going to be sold. There is now important overhead resistance for the benchmark at 3,950.

SA TradeView: We just barely missed filling ProShares UltraShort S&P 500 (SDS) late Tuesday and early Wednesday, which was a shame as the leveraged inverse index swelled 8.1% Wednesday.…The path of least resistance is still lower. Try to enter again: Buy SDS at $46.20 lmt gtc.

The Upshot

The Dow (DOW) tumbled by 3.6% to 31,490.07. The Nasdaq (NDX) was 4.7% lower at 11,418.15. Consumer discretionary and consumer staples were the biggest decliners, with all sectors in the red.

Breadth favored decliners seven-one, and there were 590 new lows vs 46 new highs. Big caps on the new high list included Exxon (XOM), Shell (SHEL), Bristol Myers (BMY), Pioneer Natural Resources (PXD), and Devon Energy (DVN).

The US ten-year yield fell by 8.6 basis points to 2.88%. West Texas Intermediate crude oil futures retreated by $3.17 to $109.23 per barrel.

Target's first-quarter adjusted earnings dove to $2.19 a share from $3.69 a year earlier, missing the $3.06 average analyst estimate compiled by Capital IQ. Target's stock plunged nearly 25%.

"Throughout the quarter, we faced unexpectedly high costs, driven by a number of factors, resulting in profitability that came in well below our expectations, and well below where we expect to operate over time," Target chief executive Brian Cornell said.

The earning's miss comes a day after Walmart (WMT) cut its fiscal 2023 profit forecast and missed Wall Street expectations for its Q1 earnings amid supply chain disruptions and rising costs. Shares of the world's largest bricks-and-mortar retailer were down 6.8% Wednesday.

Shares of Costco (COST), Dollar General (DG), and Dollar Tree (DLTR) logged losses of 11.1% to 14.4%.

Federal Reserve Chair Jerome Powell has signaled support for increasing interest rates until inflation begins to recede. In a Tuesday interview with The Wall Street Journal, Powell said the Fed will continue to raise interest rates until it is certain inflation is abating. The chair's hawkish tone helped push up the dollar, bearish for gold prices.

"According to Powell, the Fed will keep raising its key rate until there is 'clear and convincing' evidence that inflation is in retreat," Commerzbank analyst Daniel Briesemann said in a research note. "Some market participants appear to be interpreting this as meaning that the Fed will tighten its monetary policy and continue raising interest rates even if there are real economic signs of slowing."

The Atlanta Fed GDP nowcast estimate for Q2 growth was revised down to 2.4% from the 2.5% pace in the previous estimate on Tuesday. The next update is scheduled for May 25.

In other economic news, housing starts fell by 0.2% to a 1.724 million annual rate in April from a downward revised 1.728 million rate in March, with a sharp decline in single-family starts partly offset by an increase in multi-family starts.

Mortgage application volume fell sharply for the first time in three weeks as rates remained close to the highest levels since 2009, the Mortgage Bankers Association said Wednesday. The market composite index, which measures loan applications, decreased 11% for the week ended May 13, compared with a 2% increase in the previous week.

Now let’s check in on one of the untold reasons tech stocks have been so weak this year.

Learn more about Jon Markman here...