The wave of selling has become an unstoppable tsunami of pain, illustrating the old adage that selling begets even more selling. It’s fascinating because there is no doubt the stock market was poised for a 3% to 5% classic bear market pop. Instead, we got a red wave of misery.

Terminal Velocity

Terminal Velocity is the maximum velocity (speed) attainable by an object as it falls through a fluid (air is the most common example). When it comes to the stock, there is also a Terminal Velocity of sentiment.  We reached that point yesterday when the sigh of relief became a sigh of self-pity.

The Titans Are Falling

• Apple (AAPL): -5.18%
• Microsoft (MSFT): -3.32%
• Tesla (TSLA): -8.26%

The invincible tech names are the last domino to fall before big money begins to make its move. The carnage has been enormous for broader indices because of the outsized influence of these names. The NASDAQ Composite has gone down 12.39% over the past five days.

The Consumer Is Not Flushed

I cannot shake a lot of the smartest minds on Wall Street of the notion there is a magic pot of cash of $2.0 to $2.5 trillion evenly disrupted in bank accounts across the country, allowing households to weather the inflation storm. Yesterday, Consumer Discretionary (XLY) saw the biggest decline on the S&P 500.

Luxury has gone kaput now that all the stimulus checks have run dry – Louis Vuitton (LVMH) gobbled up billions of taxpayer dollars (see red arrow) but has now swooned down to a new 52-week low.

Autos Hit Speed Bump

The auto subcomponent of the Consumer Discretionary (XLY) sector was slammed 7.49% and closing in on unchanged over the past five years after surging last year to more than a 70% gain.

Musk & Long Knives

The bulk of selling pressure is coming from shares of Tesla (TSLA), which is now close to a roundtrip from the big move it made upon being included in the S&P 500 on December 21, 2020. The ‘shorts’ smell victory after losing tens of billions betting against Musk. They are going to lose again.

Technical View

Yesterday, the close was ugly and brutal and the closing bell felt humanitarian. It looks as if 3,800 is fait accompli. On the upside, 4,100 has become a key resistance point, and a move above 4,300 would draw lots of folks off the sidelines.

Breadth

My goodness, 5 billion down volumes on the NASDAQ Composite and close to four billion on the New York Exchange (NYSE). 

There were only 29 new highs against 2,372 new lows.

Market Breadth	NYSE	NASDAQ
Advancers	1,032	1,041
Decliners	2,372	3,891
New Highs	13	16
New Lows	784	1,588
Up Volume	1.91 billion	1.18 billion
Down Volume	3.94 billion	5.00 billion

After the Close

Disney (DIS) posted revenue of $20.4 billion +23.3% and earnings of $1.08, which missed the consensus by $0.11. Initially, the stock edged higher on the addition of new subscribers. But in the grand scheme of things, the revenue from that was too small to move the needle, so the stock turned lower.

Conference Call

Domestic parks are firing on all cylinders, with per capita spending, up more than 40% vs. 2019 levels. The third quarter (Q3) forecast for domestic parks is strong with the demand pipeline remaining robust.

International parks are seeing some improvement:

• Disney+ has 7.9 million new subscriptions (goal 230 to 260 million by fiscal year (FY24)

Happy Ending?

Perhaps the stock can find a way to rally today based on being oversold, but this is obviously a disjointed behemoth with an unloved CEO. There is enormous intrinsic value, but social responsibility has  leaped frog making money and treating everyone like a potential moviegoer, park attendee, or a streaming media watcher. This too shall pass, but this is a dark path for the ‘Mouse House.’

The Turn is Close

I know it doesn’t feel like it, and many are ready to throw in the towel, but this market is this close to a major bounce. I suspect we will get a series of bounces that work to form a foundation. It could take a  period of time, but the moves will be huge.

Portfolio Approach

We are adding a new position in Materials to our Hotline Model Portfolio this morning. 

Today’s Session

 

Today’s Session

Equity futures have been under pressure all morning, but it is mostly as a learned behavior rather than anything related to new developments.

PPI Report

Headline of 11.0% was slightly higher than expected core on month-to-month basis, +0.4% was much less than +0.6% consensus. 

The headline is down from May 11.5%.  We’ll take any dip in inflation reads. 

The most intriguing part of the report was the surge in goods inflation driven by construction:

• Goods +1.3%
• Construction +4.0%

All eyes are on the biggest stocks in the market, as they continue to come under siege.

New ideas have been very limited. Many are asking when we'll add more names. When risk-reward improves...right now markets are selling off on cue without regard to news or nuance within news - example yesterday' s CPI sans food, airline fees and new cars was mostly benign.

There have also been too many head-fakes.  We think the market is oversold, and it has factored in significant Fed tightening.  But this is an emotional ride lower without guardrails. 

Yes, a year from now it might not matter, but right now, in real time, letting more dust settle is the wisest move.

We know most subscribers have a limited amount of money in the market and on the sidelines - let’s take care because newly deployed cash will be the biggest = driver of percentage gains for the overall portfolio. 

If you are not a current subscriber to our Hotline Premium service, email Info@wstreet.com to get sign up today. 

Comments

So, Mr, Payne....(no pun intended) I take it you agree with the comment I made the other day (Mike Tyson- Everyone has a plan) re the consumer being "tapped out" (no pun intended). Here, I thought you were of the other camp. (The bottomless pit of money camp) But all this talk about capitulation? Hard to capitulate when as of close of business last night, the Dow and S&P had yet to technically, officially enter bear market (20%+) declines Do you not think? The Nasdaq is being crushed, but until we see more pain for the Dow and S&P, I do not think capitulation is in view. Charles Haselberger on 5/12/2022 10:08:26 AM

2nd Comment, CP. Just finished reading this commentary in its' entirety. I agree that if you strip out food, energy, and new cars, the CPI was mostly benign. But reality is....You can't strip them out. Energy is the "Key" to getting inflation under control....but now wages are a significant contributor that can not ever be reversed. (At least I don't think they can.) Charles Haselberger on 5/12/2022 10:29:16 AM

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