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Summary: Stocks moved sharply higher during Thursday's trading session, with major stock indexes showing a clear upward trend after ending Wednesday's mixed trading session. The tech-heavy Nasdaq led the way, extending yesterday's gains.

Fundamentals

U.S. stocks retreated from their intraday highs before the close on Thursday, but the major stock indexes still held strong gains. The Nasdaq rose 287.89 points, or 2.4%, to 12,142.24, the S&P 500 gained 79.36 points, or 2.0%, to 4,135.35, and the DJIA gained 524.29 points, or 1.6%, to 33,826.16.    

Wall Street's rally partly reflected a positive reaction to upbeat earnings news from Meta Platforms, the parent company of Facebook, whose shares surged 13.9% after the company reported better-than-expected first-quarter results and provided upbeat guidance for the quarter.

Media group Comcast (CMCSA) also surged after reporting first-quarter earnings that beat analysts' estimates.

Leading companies such as eBay (EBAY), Honeywell (HON), and Eli Lilly (LLY) also reported strong growth following their quarterly results.

Meanwhile, investors have largely ignored a report from the Commerce Department. The report showed that U.S. economic growth slowed much more than expected in the first three months of 2023.

Real GDP grew 1.1% in the first quarter, following a 2.6% jump in the fourth quarter of 2022, the report said. This was significantly lower than the market's previous expectation of a slowdown in GDP growth to 2.0%.

The Commerce Department said the slowdown in GDP growth mainly reflected a decline in private inventory investment and a slowdown in non-residential fixed investment.

The data may have added to optimism that the Fed is close to ending its tightening cycle ahead of next week's monetary policy meeting.

U.S. GDP growth for Q1 2023 was 1.1% quarter-on-quarter annualized, slowing sequentially for the third quarter in a row. We believe that the U.S. economy has been resilient since the beginning of the year, but it does not change the downward trend of the economy. As bank savings decline, either banks spontaneously "tighten credit," causing credit spreads to widen, or if credit tightening is not significant, the Fed continues "tightening money" and raising risk-free rates. In either case, the end result is an economic downturn.

In addition, the market should also be alert to the stickiness of inflation, the U.S. core PCE grew 4.9% quarter-on-quarter annualized in the first quarter, up from 4.4% in the fourth quarter of last year. The overall PCE chain growth rate is also higher than the end of last year. Structural inflation may lead to stagflation, which will also bring more challenges to financial markets.

On top of that, the sharp rise in U.S. stocks is also related to the relief from the collapse of First Republic Bank.

Three informed sources said there was a shift in tone from Tuesday and Wednesday among the bank's advisers. They revealed that U.S. officials are coordinating urgent talks to rescue First Republic Bank, but no agreement has been reached because of a private sector effort led by the bank's advisers.

Sources said government agencies such as the Federal Deposit Insurance Corporation (FDIC), the Treasury Department, and the Federal Reserve began meeting with financial firms in recent days to discuss how to provide a bailout for the troubled First Republic Bank.

The government's involvement could help bring more parties, including banks and private equity firms, to the negotiating table, the sources added. It is unclear whether the U.S. government is considering participating in a private-sector bailout of First Republic Bank. However, one of the sources said the government's involvement has given the bank's executives more confidence as they work on a deal to avoid a takeover by U.S. regulators.

Two of the sources revealed that U.S. officials believe a private deal would be preferable to an FDIC takeover of First Republic Bank. But the sources added that many of the options being proposed, including selling assets or creating a "bad bank" to isolate its outstanding loans, have failed to reach an agreement.

Technical Analysis

The Nasdaq surged to drive the DJIA higher as large technology companies reported upbeat results, in line with our expectations. The medium-term outlook remains positive after prices closed above the midpoint of the prior decline at 33,650. This implies that the recent correction will be short-lived.

With new bullish momentum benchmarked against the midpoint of the prior decline above the 33,650 level, the further selling pressure in the process has been weakened, paving the way for a continued rise to the 34,500 level.

Nonetheless, after the sharp drop in the previous session, the substantial absorption of funds by the bulls is still seen as a short-covering situation. Meanwhile, intra-day trading may correct further as the RSI enters overbought territory in the 1-hour timeframe. In terms of trading strategy, going short at highs is recommended.

Trading Recommendations

Trading Direction: Short

Entry Price: 33834

Target Price: 33580

Stop Loss: 34000

Valid Until: 2022-05-12 23:55:00

Support: 33768, 33647, 33590

Resistance: 33648, 33892, 34126