Strong market rally, but here's why you should be careful

Strong market rally, but here’s why you should be careful

Futures on the Dow Jones will open on Sunday evening, along with futures on the S&P 500 and Nasdaq.


The stock market rally posted strong gains in the holiday-shortened week. The Dow Jones hit a seven-month high. But the S&P 500 index reached its 200-day moving average, a key resistance zone. Several economic reports are looming next week, including the November jobs report. These will be essential for Fed rate expectations.

Investors may therefore want to exercise caution before adding a lot of very short-term exposure.

Key wins

Data storage company Pure storage (PSTG), Chinese e-commerce giant Pinduo-duo (PDD), General dollar (DG) and Ultimate Beauty (ULTA) publishes its results next week. PDD, Dollar General, Pure Storage and Ulta Beauty stocks are also close to buy points. (CRM) and Snowflake (SNOW) headlines a number of software earnings reports, with key industry-wide guidance and the outlook for IT spending. Snowflake is expected to report its first-ever quarterly earnings. But SNOW’s stock, and most of those other software games, are a long way from the highs.

Megacaps are also still struggling. You’re here (TSLA) rebounded this week, but from bear market lows. (AMZN) is still below most moving averages. Apple (AAPL), Microsoft (MSFT), Nvidia (NVDA) and Google-parent Alphabet (GOOGL) are all above their 50-day lines, but below their 200-day lines.

The video embedded in this article reviewed the market rally over the past week and analyzed Dexcom (DXCM), Avis Budget Group (CAR) and PSTG shares.

Dow Jones Futures Today

Dow Jones futures open Sunday at 6 p.m. ET, along with S&P 500 and Nasdaq 100 futures.

Remember that overnight action on futures contracts on Dow Jones 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 made solid gains during the week of Thanksgiving.

The Dow Jones Industrial Average jumped 1.7% in stock trading last week. The S&P 500 index climbed 1.5%. The Nasdaq composite advanced 0.8%. The small cap Russell 2000 rose 1%.

The 10-year Treasury yield fell 11 basis points to 3.71%.

U.S. crude oil futures fell nearly 2% to $78.31 a barrel last week.


Among the top ETFs, the Innovator IBD 50 ETF (FFTY) rose 1.1% last week, while the Innovator IBD Breakout Opportunities ETF (BOUT) rose 2%. The iShares Expanded Tech-Software Sector ETF (IGV) climbed 1.8%, with Microsoft and CRM stocks the two largest holdings. The VanEck Vectors Semiconductor (SMH) ETF edged up 0.8%, with NVDA stock a major contributor.

Reflecting more speculative stocks, ARK Innovation ETF (ARKK) fell 1.5% last week and ARK Genomics ETF (ARKG) 1.9%. Tesla stock is a major holding in Ark Invest’s ETFs.

The SPDR S&P Metals & Mining (XME) ETF jumped 4% last week, just below a potential entry. The Global X US Infrastructure Development ETF (PAVE) rose 1.8% to a seven-month high. The US Global Jets ETF (JETS) climbed 2.3% in a good week for travel games. The SPDR S&P Homebuilders ETF (XHB) rose 1.85%. ETF Energy Select SPDR (XLE) edged up 0.2%, near record highs. The Financial Select SPDR ETF (XLF) gained 2% and the Health Care Select Sector SPDR Fund (XLV) gained 1.8%, both hitting seven-month highs.

Five best Chinese stocks to watch now

Apple Stock, Megacaps

Apple stock fell 2.15% last week to 148.04, with most of that decline coming on Friday as Covid lockdowns in China weigh on iPhone production. AAPL stock found support at the 50-day line, but the 200-day line was a resistance point.

Microsoft stock rose 2.6% last week to 247.49, breaking its 50-day line again. But stocks are still well below 200 days. Nvidia stock jumped 5.6%, well above the 50-day line, but still has some work to do to recover its 200-day line. Google stock edged up 0.1%, just above its 50-day mark.

AMZN stock fell 0.7% even below its 21-day line, still near its bear market lows.

Tesla stock rebounded from Wednesday’s bear market low of 166.19, ending the week 1.5% higher at 182.56. But it’s still well below the 21-day, 50-day and especially 200-day lines.

Inventory close to buy points with revenue due

Pinduoduo revenue is due before Monday’s opening. Pinduoduo shares fell 6.4% to 65.69, but after a huge multi-week rally. PDD stock has a buy point of 72.84 handle cups and is currently finding support near its 21-day fast rising line. But the base is 47% deep. And the risks for China are high, with further lockdowns compressing an already struggling economy.

Revenue from Pure Storage is expected on Wednesday evening. PSTG stock fell 0.9% to 30.46 last week, continuing to hold its 21-day line. It has a handle cup base with a buy point of 32.07, although investors may use 32.55 as a new handle entry after a brief breakout attempt failed. Pure Storage stock now has a tight five-week pattern with a buy point of 32.55. Meanwhile, NetApp’s earnings are Tuesday night, with the storage giant back above its 200-day line.

Dollar General’s results are expected early Thursday. DG stock fell 0.2% to 257.30 last week, holding up well against its rival dollar tree (DLTR) fell on weak indications. Investors could still use a buy point of 261.69 cups, according to MarketSmith analysis.

Ulta Beauty reports late Thursday. ULTA stock rose 1.8% to 448.46 last week. The stock is extended from a cup handle buy point of 426.99 on a daily chart. On a weekly chart, Ulta Beauty is hovering around a base cup buy point of 451.40. But recent gains have come on light volume, as ULTA stock is extended from its 50-day line.

These 5 stocks to watch are close to buy points

Market rally analysis

The stock market rally had a solid week, continuing to rebound from key support levels. On Friday, the Dow Jones broke its August 16 peak to hit a seven-month high. The Russell 2000 just recovered its 200-day line on Friday.

During the week, the lagging Nasdaq bounced off its 21-day line, but is still far from its 200-day line. With Apple, Microsoft, Tesla stock and software makers so far off the highs, that’s hardly a surprise.

The S&P 500 also advanced, closing above the 4000 level. It is now within 1% of its 200-day moving average. On August 16, the S&P 500 came within a point of that key level, but then sold off for almost two months. A decisive move above the 200-day line, which coincides with a falling trendline, would signal that the current uptrend is more than just a bearish rally.

But key economic reports are looming. On Wednesday, the October JOLTS report will show job openings, with Fed Chief Jerome Powell speaking later in the day. On Thursday, the PCE price index, the Fed’s preferred gauge of inflation, will be released, along with jobless claims and the ISM manufacturing index. The November jobs report is due Friday.

Subdued inflation and jobs data will bolster expectations of a 50 basis point lower Fed rate hike on December 14 and possibly signal a further slowdown in the pace of rate hikes in early next year. The hot numbers could further upset Fed pivot hopes.

A positive market reaction to economic data could trigger a wave of buy signals. Many actions from various sectors are taking place.

Time the Market with IBD’s ETF Market Strategy

What to do now

The stock market rally is in full swing. Investors should take advantage of this uptrend with modest exposure.

In the very near term, investors may want to exercise caution before making further purchases. The market rally faces a big technical test with inflation and employment reports likely to play a key role in how this unfolds. Another big wildcard is the Covid lockdowns in China.

But now is definitely the time to prepare for new purchases. Build those watchlists, ensuring you find potential buys in a wide variety of industries. Then stay engaged with the market action. Be prepared to make new purchases or cut back based on market action.

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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