The stock market rally has receded amid weak Objective (TGT) Earnings and Vacation Orientation as well Micron technology (MU) cut memory chip production plans. The bond market is showing brighter recession risks with the 10-year Treasury yield continuing to fall while short-term rates hold high.
Electric vehicle giant Tesla (TSLA) has retreated, showing the weakest recent performance among megacap stocks.
Nvidia (NVDA), lithium giant Chilean Chemical and Mining Society (SQM) and Cisco systems (CSCO) headlined Wednesday night’s earnings.
NVDA stock edged higher in overnight trading on mixed earnings and indications.
CSCO shares rose 4% in extended shares as Cisco topped fiscal first quarter forecasts and increased revenue. Cisco stock fell 1.1% Wednesday, trading between its 50-day and 200-day lines. IBD leaderboard stock Arista Networks (ANET) rose slightly on Cisco earnings.
SQM earnings are due again tonight. SQM stock fell 2.6% on Wednesday, down more than 10% this week on concerns over lithium prices. The Chilean lithium and fertilizer giant is in cup base with a buy point of 115.82. Could work on a handle.
The Chinese e-commerce giant Alibaba (BABA) and US department store chains Macy’s (Myself by Kohl (KSS) are due early Thursday. BABA stock fell modestly on Wednesday but after climbing 11% on Tuesday. Shares of Macy’s and KSS plunged Wednesday on Target’s holiday alert.
Dow Jones Futures today
Dow Jones futures are up 0.2% from fair value. S&P 500 futures rose 0.15%. Nasdaq 100 futures gained 0.3%. CSCO stock is a constituent of the Dow Jones, S&P 500 and Nasdaq, but Nvidia has a higher weighting on the S&P 500 and Nasdaq.
Republicans have regained control of the House, according to several media outlets. But it will be a very thin majority, much less than expected before Election Day.
Remember that overnight action in Dow futures and elsewhere does not necessarily translate into actual trading in the next regular session of the stock market.
Join IBD experts as they analyze actionable stocks in the stock market rally on IBD Live
Stock market rebound
The stock market rally lost ground on Thursday, with small-caps and technologies leading the decline.
The Dow Jones Industrial Average fell 0.1% in the stock market on Wednesday. The S&P 500 index lost 0.8%. The Nasdaq composite fell 1.5%. The small-cap Russell 2000 fell 1.8%.
US crude prices fell 1.5% to $85.59 a barrel. Natural gas futures rose 2.8%.
The Treasury yield curve flashes recession risk
The 10-year Treasury yield fell 11 basis points to 3.69%, its lowest since early October and from 4.15% just a week earlier. The benchmark Treasury yield is now below the current federal funds rate range of 3.75%-4%, with the Fed expected to raise rates by 50 basis points to 4.25%-4.5 % next month.
The yield on the two-year Treasury, more closely linked to Fed policy, remained stable at 4.36%, while the three-month rate is at 4.23%. The steepening yield curve inversion between three-month and 10-year Treasuries is the steepest for a short period to the end of 2019. This points to increased risks of a recession or, at best, a negligible economic growth in 2023.
Fed Chief Jerome Powell and some of his colleagues have signaled that a recession may be needed to keep inflation in check, even as other policymakers see a good chance of a soft landing.
The ever-inverted yield curve comes amid still sound labor markets and a strong retail sales report for October.
Among the best ETFs, the Innovator IBD 50 ETF (FFTY) lost 1.7%, while the Innovator IBD Breakout Opportunities ETF (BOUT) lost just over 1%. The iShares Expanded Tech-Software Sector (IGV) ETF lost 2.1%, with many cloud software names having a bad session. VanEck Vector Semiconductor (SMH) ETF tumbled 3.6%, with shares from Nvidia and major components from Micron.
The SPDR S&P Metals & Mining ETF (XME) slipped just over 2% and the Global X US Infrastructure Development ETF (PAVE) fell 0.5%. The US Global Jets ETF (JETS) was down 2.4%. SPDR S&P Homebuilders ETF (XHB) fell 1.4%. The Energy Select SPDR ETF (XLE) was down 2% and the Financial Select SPDR ETF (XLF) was down 0.5%. The Health Care Select Sector SPDR Fund (XLV) closed just below breakeven.
Reflecting more speculative stocks, ARK Innovation ETF (ARKK) tumbled 5.15% and ARK Genomics ETF (ARKG) tumbled 3.7%. Tesla shares remain a major holding in Ark Invest ETFs.
Five top Chinese stocks to watch now
Nvidia’s earnings lost Q3 views, but revenue fell less than feared. Demand for data center chips has remained strong. Gaming revenue has plummeted, but not as much as feared. The chip giant led slightly lower on fourth-quarter sales.
Nvidia shares are up 1% in active overnight trading. Shares fell 4.5% to 159.10 on Wednesday. But NVDA shares have rallied since hitting a bear-market low of 108.13 on Oct. 13 in hopes that business will improve along the way. The chip giant has moved well above its 50-day line but is still below the 200-day mark.
Nvidia stock has no buying point in sight. Ideally, the stock should rally above the 200-day line and forge a new base.
Tesla stock fell 3.9% Wednesday to 186.92. While above its two-year low of 177.12 set on Nov. 9, TSLA stock is encountering resistance at the 10-day moving average. The EV giant has not closed above its 21-day line since Sept. 21.
Other megacaps have struggled, but Apple (AAPL), Microsoft (MSFT) and parent of Google Alphabet (GOOGL) are above their 50-day moving averages, while also Facebook-parent Metaplatforms (META) is above the 21-day line.
Meanwhile, other EV stocks look as bad or worse than Tesla. CEO Elon Musk’s Twitter reign could also weigh on TSLA stock in a number of ways.
Musk testified Wednesday in a court case about 2018 Tesla stock options that account for about $50 billion of his wealth. He has hinted that he will not remain the head of Twitter permanently.
Tesla vs. BYD: Which electric vehicle giant is the best buy?
Analysis of market rallies
The stock market rally was likely due to a pause or a pullback, and that’s what happened on Wednesday.
The Dow Jones held comfortably above the 200-day line, stopping just below August’s short-term highs. The S&P 500 looks pretty normal, with a modest decline, not far from the 200-day line.
The Nasdaq is still well above the 50-day line, but is back below its short-term highs from October. The Russell 2000 dipped below the 200-day line and broke through Monday’s intraday low.
Meanwhile, several stocks that have shown buy signals in recent sessions fell on Wednesday. Growth games faltered widely as defensive stocks rebounded and defensive growth stocks held up, even as many retailers slumped on Target’s missed earnings.
If the market recovers in the foreseeable future, Wednesday’s action will soon be forgotten. But if the Nasdaq were to dip below its 50-day mark and major stocks came under increased pressure, that would be worrying.
While markets have rightly focused on Fed policy, there are other concerns. However, the cumulative effect of the Fed’s rate hikes this year is taking a toll on the economy. And the impact will continue several months after the rate hikes end.
The inverted yield curve reflects growing recession risks.
Even now, the combination of high inflation and weakening demand is having a significant impact. Target earnings proved it, albeit rivals Walmart (WMT) has achieved excellent results and indications. Inflation may slowly ease over the next year, but that doesn’t mean the outlook for corporate earnings and stock prices is rosy.
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what to do now
Wednesday’s action offers a reason why investors should be wary of rapidly adding exposure. Buying a bunch of new positions in one day can backfire if the market pulls back, as it did on Wednesday. It is best to add exposure gradually, assuming the market moves up and your positions are progressing.
The equity market rally is still in good shape, but subject to big swings, sector rotations and earnings surprises. It is not yet clear which stocks and sectors will lead. So don’t focus too much on one particular industry or theme.
But you want to update your watchlists regularly, casting a wide net.
Early entries are still important. Traditional buy points, especially if significantly above the 50-day line, have not performed particularly well.
Investors may still want partial profits when they make a quick gain on a stock. This can give you the security of holding your remaining share for longer and will protect your portfolio from stock return trips.
Read The Big Picture daily to stay abreast of market direction and major stocks and sectors.
Please follow Ed Carson on Twitter at @IBD_ECarson for stock market updates and more.
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The 200-day average: the last line of support?