US equity benchmarks are so far doing a terrific job digesting gains, observes Bill Baruch, president of

The S&P 500 (SPX) rallied 10.4% from low to high in six trading days. In our Midday Market Minute yesterday, I pointed to a series of 100-point days as sounding nice, but ultimately something that characterizes a bear market rally and would potentially lead to a limit-down crash. Remember, we must trade the market we have, not the market we want and therefore we need the market to tell us the worst is over. The first step in this process would be to move away from the precipitous selling that took hold through April and May, where no buyers showed up on down days. Yesterday was a great start in an uphill battle.

We do find this an opportune window for US equity benchmarks to rebound. April and May were never meant to be an inflection point for inflation, it is June, July, and August, in data that begins hitting the tape in July, therefore leading into the Inflation Showdown at Jackson Hole. In comes this opportune window with earnings in the rear-view mirror, China reopening, and excessive negativity. Now that earnings are behind us, this opens the door for corporate buybacks. According to the Wall Street Journal, as of last week, “S&P 500 companies that have reported first-quarter results so far spent $269 billion on buybacks in the period, up 58% from a year earlier, according to data provider S&P Dow Jones Indices. Buybacks reached a new peak of $972 billion during the 12-month period ended in March, S&P Dow Jones Indices said, up from $499 billion during the prior-year period.” With most companies trading at lower levels, we expect this trend to continue. Shanghai, China’s largest city, was completely locked down since March. The reopening will ease supply bottlenecks and most importantly help ease the US Dollar’s broad strength against global currencies. Finally, we believe excessive negativity has led to many portfolio managers and investors being offside. These market supply-demand fundamentals can certainly help fuel higher prices. Now, if inflation proves to have cooled during those summer months, we could see a 2019-style rebound even without a sharp U-turn from the Federal Reserve.

With all of that said, it is of the utmost importance to remember Mr. Market is always right. Reiterating the above, we must trade the market we have, not the one we want. If inflation does not cool this summer, there is an extremely high probability the market will be much lower.

On today’s economic calendar, ADP Payrolls for May whiffed with 128,000 jobs added versus 300,000 expected. April was also revised from 247,000 to 202,000. This was not necessarily new news after seeing yesterday’s ISM Manufacturing Employment component contract. Initial Jobless Claims came in better at 200,000 versus 210,000 expected. Revised Q1 Unit Labor Costs increased from 11.6% to 12.6%, but Nonfarm Productivity improved from -7.5% to -7.3%; a little less-worse production still costs more. Factory Orders are due at 9:00 am CT.

Yesterday’s new low on the week was met with buying, leading to a healthy consolidation. Such slight lower lows and slight lower highs are not a bad thing as beginning to unfold into a bull-flag-like pattern. Remember, we are not extremely picky on how a bull flag appears, but we very much favor the market profile it creates, trapping shorts at those slight lower lows. In fact, we do not have major three-star support in the S&P and NQ until a lower low would trade. Of course, we would like to see constructive at first key support.

Crude Oil is rebounding from the morning low of 111.20 as the OPEC+ meeting concludes. The cartel’s meeting lasted about ten minutes and members agreed to increase production by 648,000 barrels for each July and August. This is definitively more than the trend of 400,000 increases, but now shifts focus on whether these high marks can actually be accomplished. The move also begins to confirm reports that Saudi Arabia could begin to add production to make up for Russia. Our stance has been clear, the spare capacity is simply not there, and over-compliance is likely to be a theme in the coming months. Additionally, the fact they increased production exudes a fear that demand is significantly outstripping supply, and this is bullish in itself.

Weekly EIA data is due at 10:00 am CT. Analysts expect -1.35 mb Crude, +0.533 mb Gasoline, and +0.99 mb Distillates. Yesterday’s API was, for the most part, in-line with these expectations. The survey did see a small build of 177,000 barrels at Cushing. If confirmed, it would break a three-week stretch of draws and lift inventories at the crucial hub from three-month lows.

Price action late in the session yesterday slipped from major three-star resistance at 116.43-117.07, after the Saudi reports, a level that we are using to define a breakout on a closing basis. Crude’s settlement held out above the 114.86-115.07 level in a constructive manner. Still, price action washed out early this morning and traded below 111.82-112.39 to a low of 111.20, before rebounding sharply. Given the swift rebound, our listed line of support still holds true, and today’s close will be crucial.

Gold and Silver are in rebound mode, trading sharply higher in the session on the heels of the ADP Payrolls whiff. Precious metals, and all assets for the matter, responded in a very wonky manner to yesterday’s ISM Manufacturing data. The headline read beat expectations, but the Employment Component contracted, exuding a trend towards stagflation. Treasuries sold off, meaning yields rose, the US Dollar rallied, and of course, metals were initially tagged on such a swing. However, we have seen continued construction since that point, and a stronger Chinese Yuan versus US Dollar overnight helped underpin a rally ahead of the poor jobs read. Is this the beginning of the June rally? We would like to think so, but it will all come down to tomorrow’s Nonfarm Payroll Report.

Gold and Silver have had an extremely constructive start to the session, with each exceeding first resistance levels. While holding above our Pivot and point of balance, there should be a path of least resistance higher.

Learn more about Bill Baruch at Blue Line Futures.