Dow Jones futures rose slightly overnight, as did S&P 500 and Nasdaq futures, with profits from Nvidia and Cisco leading the way.
The stock market recovery has retreated amid weakness Target (TGT) revenue and vacation forecasts, as well as Micron Technology (MU) cutting memory chip production plans. The bond market is showing greater recession risks, with the 10-year Treasury yield continuing to fall while short-term rates remain high.
VE Giant You’re here (TSLA) fell, posting the weakest recent performance among megacap stocks.
Nvidia (NVDA), lithium giant Chemical and Mining Society of Chile (m²) and Cisco Systems (CSCO) headlined Wednesday night’s earnings.
NVDA stock rose slightly in overnight trading following mixed earnings and guidance.
CSCO stock rose 4% in extended action as Cisco beat fiscal first-quarter views and increased revenue. Cisco stock fell 1.1% on Wednesday, trading between its 50- and 200-day lines. IBD Ranking Stock Arista Networks (ANET) edged higher on Cisco earnings.
SQM earnings are still due tonight. SQM stock fell 2.6% on Wednesday, down more than 10% this week on concerns about the price of lithium. The Chilean lithium and fertilizer giant is in a cup basis with a buy point of 115.82. It could be a handful.
The Chinese e-commerce giant Ali Baba (BABA) and department store chains in the United States Macy’s (M) and Kohls (KSS) are expected early Thursday. BABA shares fell slightly on Wednesday, but after rising 11% on Tuesday. Shares of Macy’s and KSS fell on Wednesday following Target’s holiday warning.
Dow Jones Futures Today
Dow Jones futures have risen a fraction of fair value. S&P 500 futures rose slightly. Nasdaq 100 futures gained 0.1%. CSCO stock is a component of the Dow Jones, S&P 500 and Nasdaq, but Nvidia has a bigger weight on the S&P 500 and Nasdaq.
The 10-year Treasury yield rose 3 basis points to 3.72%.
Crude oil futures fell 1%.
Republicans have regained control of the House, according to several media. But it will be a very slim majority, far less than expected before Election Day.
Remember that overnight action on futures contracts on Dow and elsewhere does not necessarily translate into actual trading in the next regular trading session.
Join the experts at IBD as they analyze actionable stocks in the stock market rally on IBD Live
Stock market rally
The stock market rally lost ground on Thursday, with small caps and tech leading the decline.
The Dow Jones Industrial Average plunged 0.1% in Wednesday’s stock trading. The S&P 500 index lost 0.8%. The Nasdaq composite slipped 1.5%. The small cap Russell 2000 was down 1.8%.
U.S. 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 since early October and down from 4.15% 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% in the month next.
The two-year Treasury yield, more closely tied to Fed policy, was flat at 4.36%, while the three-month rate is at 4.23%. The growing inversion of the yield curve between three-month and 10-year Treasuries is the highest for a brief period at the end of 2019. This indicates an increase in the risks of recession, or at best negligible economic growth in 2023 .
Fed Chief Jerome Powell and some of his colleagues have signaled that a recession may be needed to get inflation under control, though other policymakers see a decent chance of a soft landing.
The still-inverted yield curve comes amid 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% as many cloud software names had a bad session. ETF VanEck Vectors Semiconductor (SMH) fell 3.6%, along with Nvidia shares and major Micron components.
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) fell 2.4%. The 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 SPDR healthcare sector fund (XLV) finished just below the break-even point.
Reflecting more speculative stocks, ARK Innovation ETF (ARKK) fell 5.15% and ARK Genomics ETF (ARKG) fell 3.7%. Tesla stock remains a major holding in Ark Invest’s ETFs.
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Nvidia’s revenue missed third-quarter views, but revenue fell less than expected. Demand for data center chips remained strong. Gaming revenue plunged, but not as badly as expected. The chip giant fell slightly on fourth-quarter sales.
Nvidia stock rose 2% in active trading overnight. Shares fell 4.5% to 159.10 on Wednesday. But NVDA stock has surged since hitting a bear market low of 108.13 on Oct. 13 on hopes that business will improve going forward. The chip giant moved well above its 50-day line but is still below its 200-day line.
Nvidia stock has no buy point in sight. Ideally, stocks would rally above the 200-day line and forge a new base.
Tesla stock fell 3.9% on Wednesday to 186.92. Although above its two-year low of 177.12 set on November 9, TSLA stock is touching resistance at the 10-day moving average. The electric vehicle giant has not closed above its 21-day line since Sept. 21.
Other megacaps have struggled, but Apple (AAPL), Microsoft (MSFT) and parent company of Google Alphabet (GOOGL) are above their 50-day moving averages, while even Facebook-parent Metaplatforms (META) is above its 21-day line.
Meanwhile, other electric vehicle stocks look as bad or worse than Tesla. CEO Elon Musk’s Twitter reign could also weigh on TSLA shares in a variety of ways.
Musk testified on Wednesday in a court case over 2018 Tesla stock options that account for about $50 billion of his wealth. He hinted that he would not remain the head of Twitter permanently.
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Market rally analysis
The stock market rally was likely due to a pause or pullback, and that’s what happened on Wednesday.
The Dow Jones held comfortably above the 200-day line, stopping just below its August short-term highs. The S&P 500 looks pretty normal, with a slight decline not far from the 200-day line.
The Nasdaq is still clearly above the 50-day line, but is back below its October short-term highs. The Russell 2000 fell below the 200-day line and broke above Monday’s intraday low.
Meanwhile, several stocks that have issued buy signals in recent sessions have come back down on Wednesday. Growth plays largely faltered as defensive names rebounded and defensive growth stocks held steady, though many retailers fell on Target’s earnings woes.
If the market recovers in the near future, Wednesday’s action will soon be forgotten. But if the Nasdaq drops below its 50-day mark and major stocks come under more pressure, that will be worrisome.
While markets have rightly focused on Fed policy, there are other concerns. Still, the cumulative effect of the Fed’s rate hikes this year is weighing heavily on the economy. And the impact will continue for several months after the end of the rate hikes.
The inverted yield curve reflects rising recession risks.
Even now, the combination of high inflation and weaker demand is weighing heavily. Target earnings showed that, although rival walmart (WMT) has achieved solid results and advice. Inflation may slowly fade over the coming year, but that doesn’t mean the outlook for corporate earnings and stock prices is bright.
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What to do now
Wednesday’s action offers a reason why investors should be cautious before quickly adding exposure. Buying a bunch of new positions in one day can backfire if the market pulls back, as it did on Wednesday. Better to add exposure gradually, assuming the market recovers and your positions grow.
The stock market rally is still good, but it is subject to strong swings, sector rotations and earnings surprises. It is still unclear which actions and which 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 registrations are always important. Traditional buy points, especially if significantly above the 50-day line, haven’t done particularly well.
Investors may still want to take partial profits when they get a quick gain on a stock. This can give you the confidence to hold onto the remaining stake for longer and will protect your portfolio against stock swings.
Read The Big Picture every day to stay in tune with market direction and top stocks and sectors.
Please follow Ed Carson on Twitter at @IBD_ECarson for stock market updates and more.
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