Dow Jones futures fell solidly Thursday morning, along with S&P 500 futures and Nasdaq futures.
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The stock market rally reversed lower on Wednesday, with the S&P 500 and Dow Jones undercut or testing key levels amid surprisingly weak economic data and hawkish Fed officials.
Apple (AAPL), Microsoft (MSFT), parent company of Google alphabet (GOOGL) and Tesla (TSLA) met resistance at key levels on Wednesday. None of these megacaps are close to a buy point.
Some leading stocks have struggled, such as Celsius (CELH) while others modestly retreated and some rose higher.
Alcoa reported earnings after the close. The aluminum giant reported a quarterly loss while sales lagged. AA-Shares fell solidly in extended trading. Shares have been up since late September and recently re-attained their 200-day moving average.
Netflix (NFLX) Headlines Thursday earnings reports. NFLX stock fell Wednesday, not far from multi-month highs. Netflix earnings, subscriber results and guides will also be important for streaming games as well Disney (DIS).
Dow Jones futures today
Dow Jones futures fell 0.9% versus fair value Procter & Gamble (PG) a slight burden for blue chips despite broadly similar results. S&P 500 futures slumped 0.9% and Nasdaq 100 futures 0.9%.
The 10-year government bond yield rose 4 basis points to 3.41%.
Crude oil futures fell slightly. Copper prices fell by more than 1%.
At 8:30 am ET, investors get another set of economic data: weekly jobless claims, December housing starts and the Fed January manufacturing index in Philadelphia.
Keep in mind that overnight action in Dow futures and elsewhere doesn’t necessarily translate to actual trading in the next regular trading session.
Join IBD experts as they analyze actionable stocks in the stock market rally on IBD Live
stock market rally
The stock market rally started with modest to solid gains on Wednesday, but soon turned solid lower as investors digested economic data and Fed comments.
Ahead of the market open, December’s PPI, retail sales and industrial production all showed sharp falls, far more than expected. Cooler inflation and a rapid economic slowdown boosted expectations for slower Fed rate hikes and a short-term freeze, but also stoked recession fears.
St. Louis Fed President James Bullard and Cleveland Fed President Loretta Meister both said they expect the central bank to hike rates above 5%. That’s in line with the Fed’s forecasts for a “final rate” of 5.1%, but slightly more than markets are currently expecting.
Later, the Fed’s Beige Book report forecast “little growth” in the coming months. Several Fed districts reported slowing inflation, but few saw weaker job markets.
Dow Jones Industrial Average falls
The Dow Jones Industrial Average slipped 1.8% in trading on Wednesday. The S&P 500 index fell 1.6%. The Nasdaq Composite fell 1.4%. Small-cap Russell 2000 lost 1.6%.
Apple shares fell 0.5% to 135.21 but retreated from an intraday high of 138.61, just below the 50-day moving average. MSFT shares broke through its 50-day moving average for the day but closed up 1.9% at 235.81. Microsoft announced early Wednesday that it would cut 10,000 jobs, or 5% of its workforce. AAPL and Microsoft are constituents of the Dow Jones, S&P 500 and Nasdaq.
Google stock fell 0.2% after finding resistance at the 50-day moving average for the third consecutive day, but found support at the 21-day price.
Tesla lost 2.1% to 128.78 after hitting 136.66 on Wednesday morning. Shares are back below the 21-day moving average after rising 7.4%. TSLA stock hit a bear market low of 101.81 on Jan. 6 but rallied on the day and beyond. Tesla has rallied on hopes that sweeping price cuts will boost demand, but earnings growth is likely to slow in 2023.
The 10-year government bond yield fell 16 basis points to 3.37%, a four-month low. The two-year Treasury yield, which is more closely linked to Fed policy, slipped to 4.11%, its lowest level since early October.
Markets have essentially locked into a quarter-point rate hike by the Fed on February 1st. Investors strongly favor another quarter-point hike in late March, which would take the policy rate to 4.75%-5%. But there’s now a 25 percent chance it won’t go any further.
US crude prices fell 0.9% to $79.48 a barrel, falling from $82.38 on the intraday. Natural gas collapsed 7.7%. Copper prices trimmed intraday gains to just 0.3% but are up 13% in a nine-day winning streak.
ETFs
Among growth ETFs, innovator IBD 50 ETF (FFTY) fell just over 1%. The iShares Expanded Tech-Software Sector ETF (IGV) fell 1.25%, with MSFT shares a key position. The VanEck Vectors Semiconductor ETF (SMH) is down 0.6%.
ARK Innovation ETF (ARKK) slumped 2.9% and ARK Genomics (ARKG) 1.6%, reflecting stocks with more speculative histories. TSLA shares remain a key position in Ark Invest’s ETFs. Cathie Wood’s Ark has been loading onto Tesla for the past few weeks.
The SPDR S&P Metals & Mining ETF (XME) is down 1.7% with AA stocks being a notable component. US Global Jets (JETS) fell 1.4%. SPDR S&P Homebuilders (XHB) fell 1%. The Energy Select SPDR ETF (XLE) was down 1.8% and the Financial Select SPDR ETF (XLF) was down 1.9%. The Health Care Select Sector SPDR Fund (XLV) fell 1.4%
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Analysis of the market rally
The stock market rally suffered a reversal to the downside on Wednesday after Tuesday’s mixed session.
The S&P 500 fell below its 200-day moving average to just above its 50-day moving average. The Dow Jones dipped below its 21-day and 50-day moving averages after regaining those levels on January 6th.
The Russell 2000 came even closer to its late 2022 highs on Wednesday but reversed lower for the second straight day, this time with a more pronounced momentum.
The Nasdaq Composite, which had been recovering for seven sessions, fell back slightly. But it’s still above its 50-day moving average.
While markets are cheering cooler inflation data and slowing job and wage growth, they are not keen on an actual recession. So while investors initially celebrated the sharp fall in producer prices, they were unnerved by hawkish comments from the Fed amid surprisingly weak retail sales and industrial production data.
The stock market rally was probably due for a pullback anyway. It would have been nice for the S&P 500 to hold its 200-day mark and the Dow Jones to find support at the 50-day mark, but they haven’t fallen significantly.
The question now is whether Wednesday’s pullback is just a healthy pause or something more serious. A clear break below the 50-day mark would be more concerning for the S&P 500.
It’s no surprise that megacap names like Apple, Microsoft, Google and Tesla fell back from around key levels as the S&P 500 met resistance.
Leading stocks generally fell. Some tested or undercut recent buy points, such as B. the CELH share. But Celsius, which fell 9.6% and closed below its 50-day moving average, was hit unusually hard.
Many other leading companies that have been looking longer need a market pause to form handles or pull back to moving averages.
Meanwhile, Chinese stocks retreat this week after a big reopening rally.
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What now
Just as the rally in stock markets was gaining momentum, Wednesday’s pullback came. But after a strong run from Jan. 6, major indices and leading stocks in general gave back only a fraction of recent gains. This is in contrast to the past few months, where the indices have had a strong day or two that would quickly roll back.
However, because of this, you need to be patient and gradually increase exposure, and only if the market pulls you in. Don’t buy extended stocks, and don’t get too focused on a specific stock, sector, or theme.
If you’ve slightly increased exposure over time in recent sessions, you’re probably fine. But if you were from, say, 30% fully invested Tuesday afternoon through Wednesday morning, you could have taken some notable losses by Wednesday’s close.
Ideally, the market decline is modest and creates new, safer buying opportunities. But until this market move breaks out, be careful about new purchases. Use this time to update your watchlists and check for new setups.
Keep in mind that earnings season could turn the market rally, and individual stocks in particular, on their head. Netflix earnings are Thursday night with the oilfield services giant SLB (SLB) due Friday morning. Microsoft and Tesla have earnings next week, Apple and Google the following week, along with hundreds of other companies.
Read The Big Picture every day to keep up to date with market direction and leading stocks and sectors.
Please follow Ed Carson on Twitter at @IBD_ECarson for stock market updates and more.
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