Dow Jones futures fell slightly on Monday morning, along with S&P 500 and Nasdaq futures, with the Federal Reserve meeting in focus.
The stock market suffered damaging losses last week on a surprisingly hot CPI inflation report, as well as some earnings reports or warnings. The major indexes were below their 50-day moving averages and shed some more key levels on Friday. Many leading stocks also struggled.
It is a time for investors to have minimal exposure, at most. Create watchlists with stocks with strong relative strength and holding key levels. Tesla (TSLA), Enphase Energy (ENPH), Celsius Holdings (CELH), Wolfspeed (WOLF) i Vertex Pharmaceuticals (VRTX) all qualify.
Of course, shares of Tesla, Enphase, etc. they seem robust now, but they may not in the next few days. Many stocks looked strong until last Tuesday. Others looked solid through Thursday or Friday.
WOLF shares are on the IBD Leaderboard watch list. Tesla, Enphase and CELH stocks are in the IBD 50. ENPH and Vertex stocks are in the IBD Big Cap 20.
The Fed meeting is September 20-21. Following Tuesday’s consumer price index, which showed strength everywhere outside of gasoline, markets bolstered expectations for a third straight 75 basis point Fed rate hike. (There’s little chance of a monster 100 basis point move.) Investors will focus on what Fed policy indicates going forward.
The Fed’s quarterly projections will indicate where policymakers see the Fed funds rate going next.
Right now, the market is leaning toward another rate hike of 75 basis points in November, followed by 25 or 50 basis points in December. That would bring the target fed funds rate to 4%-4.25% or 4.25%-4.5%, versus expectations of 3.75%-4% ahead of the CPI report.
Fed Chairman Jerome Powell will make his remarks after the meeting at 2:30 pm ET. Powell made it abundantly clear in his August 26 Jackson Hole speech that the Federal Reserve would not repeat its mistakes of the 1970s by easing policy too quickly.
Dow Jones futures today
Dow Jones futures fell 0.1% to fair value. S&P 500 futures lost 0.2% and Nasdaq 100 futures fell 0.4%.
The price of crude oil rose a fraction. Natural gas futures fell 2%.
China’s Chengdu said its Covid lockdown will end in an “orderly manner”, and public transport and normal work will resume on Monday, but still with significant restrictions. The southwestern city of more than 21 million people went into lockdown on September 1, adding to China’s economic woes. Chengdu’s might boost optimism about the Chinese economy, but the “zero-Covid” policy means severe restrictions are a constant threat anywhere in the country.
Remember that overnight action in Dow futures and elsewhere does not necessarily translate into actual trading in the next normal stock market session.
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Stock market last week
The stock market suffered heavy losses last week, reversing strongly after Monday’s solid gains.
The Dow Jones Industrial Average fell 4.1% in the stock market last week. The S&P 500 sank 4.8%. The Nasdaq composite fell 5.5%. The small-cap Russell 2000 gave up 4.5%.
The 10-year Treasury yield rose 13 basis points to 3.45%, the seventh straight weekly gain. At one point on Friday, the 10-year yield hit 3.483%, exactly matching the 11-year high set on June 14.
US crude futures fell 1.9% to $85.11 a barrel last week, the third straight weekly decline. Natural gas prices sank 2.7%, but after a wild week of gains and losses.
Among the top ETFs, the Innovator IBD 50 ETF ( FFTY ) suffered 5% last week, while the Innovator IBD Breakout Opportunities ETF ( BOUT ) gave up 4.2%. The iShares Extended Technology Software Sector ETF ( IGV ) fell 8.3%. The VanEck Vectors Semiconductor ETF (SMH) gave up 6%.
SPDR S&P Metals & Mining ETF (XME) fell 10.3% last week. The Global X US Infrastructure Development ETF (PAVE) 7.5%. US Global Jets ETF (JETS) fell 5%. SPDR S&P Homebuilders ETF (XHB) fell 6.9%. The Energy Select SPDR ETF (XLE) shed 2.7% and the Financial Select SPDR ETF (XLF) lost 3.9%. The Select Healthcare Sector SPDR Fund ( XLV ) declined 2.3%
Reflecting more speculative stocks, the ARK Innovation ETF ( ARKK ) fell 4.5% last week and the ARK Genomics ETF ( ARKG ) fell 5.3%. Tesla stock is a major holding in Ark Invest’s ETFs.
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Enphase shares rose 4% last week to 318.01, continuing to find support in a 21-day rising streak. A pullback to the 21-day, perhaps a pause for the 50-day line to catch up, could provide a safer buying opportunity. A number of solar games still look strong.
CELH shares fell 4.9% to 100.70 last week, but found support at the 10-week moving average. A move above Thursday’s high of 108.37 could provide an aggressive entry. In a few weeks, Celsius stock could make a new base with a buy point at 118.29.
Stock of WOLVES
EV-focused chipmaker Wolfspeed rose 5.25% to 120.21 last week, including Friday’s 2.8% gain. Investors could treat 123.35 as a buy point for WOLF shares from a hold in a longer consolidation.
Vertex shares fell 0.9% last week to 289.42, but rose 0.8% on Friday to break above the 21-day, 50-day and 10-week lines. A move above the September 12 high of 296.14 would offer an early entry. VRTX stock may have a flat base in a few days, with a buy point at 306.05.
Tesla shares rose 1.2% to 303.35 last week, after rising 10.9% the previous week. Shares of the electric vehicle giant had support at the 200-day moving average.
TSLA stock’s relative strength line has improved considerably. over the past two weeks, reaching a maximum of five months. The RS line, the blue line in the chart provided, tracks a stock’s performance against the S&P 500 index.
Investors could use a move above Thursday’s high of 309.12 as an aggressive entry, or the short-term high of 314.64. It would still be a long way from a traditional point of purchase.
For all these stocks, weak market conditions now increase the risks of any purchase.
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Stock market analysis
The stock market started last week with a strong gain on Monday, which now seems like a long time ago. Major indexes fell through their 50-day moving averages on Tuesday. On Friday, the Nasdaq and S&P 500 closed below their September lows and late July lows, even as they came off intraday lows.
The major indexes have now recovered more than half of their gains from mid-June to mid-August.
Yes, some top stocks held up, but for every Tesla, Vertex or Celsius, there were several quality names that suffered damaging losses.
Tuesday’s CPI report not only caused serious technical damage to the market, but undermined the broader case for the tap. Investors had been betting that a domestic inflation report would spur the Fed to start holding back on rate hikes, at least after September. These hopes have been dashed.
It’s the second time markets have been too bullish on Fed policy. The summer rally was spurred largely by investors expecting the Fed to end rate hikes soon, then start cutting in 2023. Powell’s Jackson Hole speech ended with talk of a “pivot of the Fed” to lower rates.
The actual Fed meeting on Wednesday may not be a big market mover, given how much investors have adjusted over the past three weeks.
Rates will be high and stay there for an extended period. The Fed is willing the US to fall into recession to wipe out inflation.
Aside from the drop in jobless claims, which only reinforced the Fed’s concerns, recent economic data has been disappointing. An environment of high inflation, high wages and low growth is a huge challenge for any business.
The disaster FedEx (FDX) earnings and comments, mixed results from Adobe (ADBE) and notices of Neck (NUE) i US steel (X) reflect that companies are facing a prolonged period of uneven or weak results. The multinationals and exporters that dominate the S&P 500 may be particularly exposed, given the strength of the dollar along with weakness in Europe and China.
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what to do now
The stock market is not in good condition. Macroeconomic conditions are poor. Investors should consider that the market could undercut the June lows or be limited for weeks or even months until there is real clarity on the end of the Fed’s rate hikes.
Investor exposure should be minimal. There is nothing wrong with being 100% cash, especially if recent trades have gone against you.
Focus on building your watchlists, paying attention to actions that show resilience. If the market continues to be weak, some of these names will fail, while others will emerge. The key is to have an updated list when market conditions improve and you are ready to take advantage.
Read The Big Picture every day to stay in sync 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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