The S&P 500 (SPX) tumbled Tuesday out of the gate as traders worried about retailers and swollen inventories, states Jon Markman, editor of Strategic Advantage.

The benchmark S&P fell 0.5% to 4,080, slightly below the first critical support level. And as if by magic, that’s when buyers returned. By late afternoon bears were into a full short-covering panic. The S&P 500 finished at 4,161, a gain of 1%. Traders are right to worry about Target (TGT) and its inventory problem, and that surging energy prices are eating into profit margins across every major sector of the economy. However, stock prices do not always reflect the current news cycle. Sharp rallies in bear markets are common.

I have been expecting bears to ultimately concede an advance back to the 50-day moving average for the S&P 500. For Wednesday that marker will come in at 4,223, an advance of 1.6% from Tuesday’s close. Given the larger trend, bears should be expected to reload short positions at that level and press stocks lower again. Critical support for the benchmark is now 4,090. Any close below that point will invite an intense down spiral to a test of 3,810, the May low.

SA TradeView: Our ProShares UltraShort S&P 500 (SDS) position slipped 1.9% Tuesday to $42.55. Target remains $45.30; stop is $42.00.

The Upshot

The Dow (DJI) added 0.8% to 33,180.14 and the Nasdaq (NDX) rose 0.9% to 12,175.23. The energy sector led gainers while consumer discretionary was the sole decliner, weighed down by Target (TGT) cutting its operating margin guidance for the fiscal second quarter.

The retail giant said it plans to reduce its inventory balance for the remainder of the year through actions including canceling orders. It now expects the operating margin to be about 2% for the fiscal second quarter, down from its guidance last month for the rate to be close to its first-quarter figure of 5.3%. Shares of the department store chain slid 2.4%. Walmart (WMT) and Home Depot (HD) also closed lower.

Global economic growth will likely lose momentum this year, with the Ukraine war, soaring inflation, and rising interest rates threatening what is now considered "a precarious recovery," the World Bank forecast Tuesday. Real gross domestic product is now seen rising 2.9% in 2022, significantly lower than a 4.1% rise previously projected in January. The US economy is expected to expand 2.5% this year, down 1.2 percentage points from the prior forecast.

The US ten-year yield declined by 5.9 basis points to 2.98%. West Texas Intermediate crude oil futures climbed by $1.46 to $119.96 per barrel. Goldman Sachs raised its forecast for average Brent crude oil prices through the first half of 2023 by $10 per barrel as it sees supply remaining insufficient to meet demand.

Breadth favored advancers 3-1, and there were 207 new highs vs 169 new lows. Big caps on the new high list included Exxon Mobil (XOM), Shell (SHEL), TotalEnergies (TTE), ConocoPhillips (COP), and BP (BP).

"Supply remains inelastic to higher prices with core-OPEC (higher) and exempt countries (lower) production shifts broadly offsetting," the investment bank said in a report. "On the demand side, the negative global growth impulse remains insufficient to rebalance inventories at current prices."

In economic news, the US trade deficit narrowed to $87.08 billion in April from $107.65 billion in the previous month, beating estimates for an $89.5 billion gap, according to data compiled by Bloomberg.

In company news, Apple (AAPL) suffered a setback on Tuesday after the European Union reached a provisional agreement on a mandatory common charging port for electronic devices such as smartphones and tablets. Still, Apple closed 1.8% higher. Redbook reported that US same-store retail sales were up 12.4% year-over-year in the week ended June fourth, slower than a 12.6% gain in the prior week that included the lead-up to Memorial Day.

Learn more about Jon Markman here...