Dow Jones futures rose slightly overnight, along with S&P 500 futures and Nasdaq futures, with Nvidia and Cisco gains taking center stage.
The stock market rally retreated into a weak period Target (TGT) earnings and vacation guidance, as well Micron technology (MU) reduce memory chip production plans. The bond market is flashing with more recession risks, with 10-year Treasury yields continuing to fall while short-term rates remain high.
EV giant Tesla (TSLA) pulled back, showing the weakest recent performance among mega-cap stocks.
Nvidia (NVDA), lithium giant Sociedad Quimica and Minera de Chile (SQM) and Cisco systems (CSCO) headlined Wednesday night’s earnings.
NVDA shares rose slightly in overnight trading following mixed gains and guidance.
CSCO shares rose 4% in extended action as Cisco topped fiscal Q1 views and led revenue. Cisco shares fell 1.1% on Wednesday, trading between the 50-day and 200-day lines. IBD Leaderboard stock Arista Networks (ANET) was up slightly on Cisco revenue.
SQM earnings are yet to be paid tonight. SQM shares fell 2.6% on Wednesday, down more than 10% this week amid lithium price concerns. The Chilean lithium-and-fertilizer giant sits in a cup base with a buy point of 115.82. It could work on a handle.
Chinese e-commerce giant alibaba (BABA) and American department store chains Macy’s (M) and from Kohl (KSS) are early on Thursday. BABA shares fell modestly on Wednesday, but after rising 11% on Tuesday. Shares of Macy’s and KSS plummeted Wednesday after Target’s holiday warning.
Dow Jones Futures Today
Dow Jones futures rose 0.15% from fair value. S&P 500 futures rose 0.2%. Nasdaq 100 futures gained 0.3%. CSCO stock is a Dow Jones, S&P 500 and Nasdaq component, but Nvidia weighs more heavily on the S&P 500 and Nasdaq.
The 10-year Treasury yield increased 2 basis points to 3.71%.
Republicans have regained control of the House, according to multiple media outlets. But it will be a razor-thin majority, much less than expected for Election Day.
Remember that overnight action in Dow futures and elsewhere does not necessarily translate into actual trading in the next regular trading session.
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Stock market rally
The stock market rally lost ground on Thursday, with small caps and techs leading the decline.
The Dow Jones Industrial Average fell 0.1% during Wednesday trading. The S&P 500 index lost 0.8%. The Nasdaq composite fell 1.5%. The small-cap Russell 2000 lost 1.8%.
US crude oil prices fell 1.5% to $85.59 a barrel. Natural gas futures rose 2.8%.
Treasury Yield Curve Flashes Recession Risk
The 10-year Treasury yield fell 11 basis points to 3.69%, the lowest level since early October and down from 4.15% just a week earlier. Benchmark government bond yields are now below the current Fed 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 two-year government bonds, which is more closely related to Fed policy, was flat at 4.36%, while the three-month yield was 4.23%. The steepening inversion of the yield curve between three-month and ten-year government bonds is the highest since a short period at the end of 2019. This points to increasing recession risks, or at best negligible economic growth in 2023.
Fed Chief Jerome Powell and some of his colleagues have indicated that a recession may be necessary to bring inflation under control, although other policymakers see a good chance of a soft landing.
The ever-inverted yield curve stems from still robust labor markets and a strong retail sales report for October.
Among the top ETFs, the Innovator IBD 50 ETF (FFTY) fell 1.7%, while the Innovator IBD Breakout Opportunities ETF (BOUT) lost just over 1%. The iShares Expanded Tech-Software Sector ETF (IGV) lost 2.1%, with many cloud software names having a bad run. The VanEck Vectors Semiconductor ETF (SMH) fell 3.6%, holding Nvidia shares and Micron majors.
SPDR S&P Metals & Mining ETF (XME) fell just over 2% and the Global X US Infrastructure Development ETF (PAVE) fell 0.5%. The US Global Jets ETF (JETS) lost 2.4%. SPDR S&P Homebuilders ETF (XHB) fell 1.4%. The Energy Select SPDR ETF (XLE) fell 2% and the Financial Select SPDR ETF (XLF) fell 0.5%. The Health Care Select Sector SPDR Fund (XLV) ended just short of break-even.
Reflecting more speculative story stocks, ARK Innovation ETF (ARKK) fell 5.15% and ARK Genomics ETF (ARKG) fell 3.7%. Tesla stock remains an important position in Ark Invest’s ETFs.
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Nvidia revenue missed Q3 renders, but revenue fell less than feared. Demand for data center chips remained strong. Gaming revenues fell, but not as much as feared. The chip giant went slightly lower on fourth-quarter sales.
Nvidia shares rose 2% in active overnight trading. The stock fell 4.5% to 159.10 on Wednesday. But NVDA shares have risen since the bear market low of 108.13 on Oct. 13, hoping things will improve over time. The chip giant has moved well above the 50-day mark, but is still below the 200-day mark.
Nvidia stock has no buying point in sight. Ideally, stocks would break above the 200-day mark and forge a new base.
Shares of Tesla fell 3.9% to 186.92 on Wednesday. Although TSLA stock is above a two-year low of 177.12 on Nov. 9, it is encountering resistance at the 10-day moving average. The EV giant has not closed above the 21-day line since September 21.
Other megacaps have struggled, but Apple (AAPL), Microsoft (MSFT) and Google older Alphabet (GOOGL) are above their 50-day moving averages, while even Facebook is older Meta platforms (META) is above the 21-day line.
Meanwhile, other EV stocks are looking just as bad or worse than Tesla. Also, CEO Elon Musk’s reign on Twitter could weigh on TSLA stock in several ways.
Musk testified Wednesday in a lawsuit over 2018 Tesla stock options that account for about $50 billion of his wealth. He hinted that he will not be permanent chief of Twitter.
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Analysis of the market rally
The stock market rally was probably due for a pause or a pullback, which is what happened on Wednesday.
The Dow Jones remained comfortably above the 200-day line and paused just below the August short-term highs. The S&P 500 looks pretty normal, with a modest decline not far from the 200-day mark.
The Nasdaq is still well above the 50-day line, but is back below October’s short-term highs. The Russell 2000 fell below the 200-day line, breaking Monday’s intraday low.
Meanwhile, several stocks that gave buy signals in the past few sessions fell again on Wednesday. Growth was largely stagnant, while defensive names rallied and defensive growth stocks held up, though many retailers were hurt by Target’s profit loss.
If the market recovers in the near future, Wednesday’s action will soon be forgotten. But if the Nasdaq drops below the 50-day mark and leading stocks come under more pressure, that will be a cause for concern.
While markets are rightly focused on Fed policy, there are other concerns. Still, the cumulative effect of the Fed’s rate hikes this year is taking its toll on the economy. And the impact will last several months after rate hikes finally end.
The inverted yield curve reflects increasing recession risks.
Even now, the combination of high inflation and falling demand is taking a significant toll. Target earnings showed that, albeit rival walmart (WMT) had strong results and guidance. Inflation may ease slowly 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 provides a reason why investors should be careful about adding exposure quickly. Buying a bunch of new positions in one day can backfire if the market pulls back, like Wednesday. It is better to add exposure gradually, assuming the market rally and your positions progress.
The stock market rally is still in good shape, but prone to large swings, sector rotations and earnings surprises. It is not yet clear which stocks and sectors will lead. So don’t concentrate too much on a particular sector or theme.
But you want to update your watchlists regularly and cast a wide net.
Early submissions are still important. Traditional buy points, especially if they’re noticeably above the 50-day mark, haven’t worked out particularly well.
Investors may still want to take partial profits if they make a quick profit on a stock. That can give you the confidence to hold the remaining interest longer and will protect your portfolio from the equity returns.
Read The Big Picture every day to stay in sync with market direction and leading stocks and sectors.
Follow Ed Carson on Twitter at @IBD_ECarson for stock market updates and more.
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