Dow Jones futures fell solidly early Thursday, along with S&P 500 futures and Nasdaq futures, as investors continued to mull Wednesday’s Federal Reserve news. Weak Chinese economic data and upcoming US economic reports also were in focus, along with Elon Musk’s latest Tesla sales.
The stock market rally reversed lower Wednesday after the Federal Reserve penciled in 5.1% as the new target peak rate and Fed chief Jerome Powell demanded “substantially more evidence” that inflation is getting under control.
But stocks pared losses in whipsaw action as investors also mulled other Powell comments and hopes for even-slower rate hikes to start 2023. Tesla (TSLA) CEO Elon Musk disclosed late Wednesday’s that he sold about $3.6 billion worth of TSLA stock this week, as shares have tumbled to hit fresh bear-market lows. Apple (AAPL) fell below its 50-day moving average.
But solar stocks were strong, with the Invesco Solar ETF (TAN) flashing a buying opportunity, as EnphaseEnergy (ENPH), SolarEdge Technologies (SEDG) First Solar (FSLR) and Array Technologies (ARRY) all rose.
Fed Rate Hike, Peak Rate
The central bank hiked the fed funds rate by 50 basis points, to 4.25%-4.5% on Wednesday afternoon, as expected. But policymakers, in new quarterly projections, also now see a peak rate of 5.1%, up from 4.6% at the September Fed meeting. Fed chief Powell had stated in recent weeks that the peak rate was likely headed higher. But 5.1% was above market expectations, especially after Tuesday’s relatively tame inflation report.
Fed Chief Powell Hawkish, Dovish
Powell, speaking shortly after the Fed meeting announcement and projections, said the full effects of this year’s Fed rate hikes have not been felt yet, “but we have more to do.” The Fed chief noted the “welcome reduction” in price gains in the last two CPI reports, but said policymakers need “substantially more evidence to have confidence that inflation is on a sustained downward path.”
Powell didn’t rule out a further step-down in rate hikes, to just a quarter point in February. But where the fed funds rate peaks, and how long it stays high, is more important, he stressed. Notably, Powell doesn’t see any rate cuts in 2023.
But he also said “Our policy is getting into a pretty good place now.”
Markets are pricing in a 72% chance of a quarter-point Fed rate hike, to a 4.5%-4.75% range, up from 60% on Tuesday. Notably, investors expect another quarter-point hike in late March, but now see a decent chance of no move at all.
The Fed continues to see a growth slowdown in 2023, not an actual recession.
The major indexes, all up modestly heading into the Fed meeting announcement and Powell’s speech, turned lower into volatile trading. For a second straight session, the S&P 500 index moved above the 200-day moving average but closed below that key level.
Investors should be cautious about adding exposure in the current market, with the indexes volatile and near key levels.
China, US Economic Data
Chinese retail sales tumbled 5.9% in November vs. a year earlier, far worse than expected and deteriorating from October’s 0.5% drop. Industrial production climbed 2.2%, with growth slowing far more than forecast from October’s 5%.
China Covid lockdowns took a serious toll on the economy. Covid rules are rapidly easing in the past few weeks, but now China is bracing for a massive wave of infections.
Investors will get US retail sales data for November, the December Philly Fed manufacturing index and weekly jobless claims, at 8:30 am ET. November industrial production will follow at 9:15 am ET.
Dow Jones Futures Today
Dow Jones futures fell 0.9% vs fair value. S&P 500 futures tumbled 1.1% and Nasdaq 100 futures skidded 1.3%.
The Bank of England, European Central Bank and the Swiss central bank both raised rates by 50 basis points on Thursday, as expected. The ECB also plans to start reducing its balance sheet.
The 10-year Treasury yield fell 1 basis point to 3.49%.
Remember that overnight action in Dow futures and elsewhere doesn’t necessarily translate into actual trading in the next regular stock market session.
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Stock market rally
The stock market rally rose heading into the Fed meeting announcement, then reversed lower in volatile action the rest of the session.
The Dow Jones Industrial Average fell 0.4% in Wednesday’s stock market trading. The S&P 500 index gave up 0.6%. The Nasdaq composite lost 0.8%. The small-cap Russell 2000 ceded 0.7%.
Apple stock declined 1.55% to 143.21, back below the 50-day moving average.
US crude oil prices climbed 2.5% to $77.28 a barrel.
The 10-year Treasury yield closed flat at 3.5%.
Among the best ETFs, the Innovator IBD 50 ETF (FFTY) fell 0.4%, while the Innovator IBD Breakout Opportunities ETF (BOUT) edged down 0.1%. The iShares Expanded Tech-Software Sector ETF (IGV) lost 0.2%. The VanEck Vectors Semiconductor ETF (SMH) slumped 1.7%.
Reflecting more-speculative story stocks, ARK Innovation ETF (ARKK) gave up 1% and ARK Genomics ETF (ARKG) 0.7%. Tesla stock is a major holding across Ark Invest’s ETFs. Cathie Wood bought more than 70,000 TSLA shares Wednesday in various Ark ETFs.
The SPDR S&P Metals & Mining ETF (XME) retreated 0.9%. SPDR S&P Homebuilders ETF (XHB) is down 0.5%. The Energy Select SPDR ETF (XLE) stepped back 0.6% and the Financial Select SPDR ETF (XLF) 1.25%. The Health Care Select Sector SPDR Fund (XLV) edged up 0.2%.
The Invesco Solar ETF rose 1.8% to 82.61 on Wednesday. The TAN ETF has an 84.28 cup-with-handle buy point, but investors could have taken an early entry from the 21-day moving average.
Right now solar stocks are generally moving higher together, so TAN is a good way to play the sector upside with less individual stock risk.
Enphase Energy, First Solar and SEDG stock are the three biggest components, accounting for nearly a third of TAN’s weight.
ENPH stock is now slightly extended from its own cup-with-handle buy point, according to MarketSmith analysis. SEDG stock is also extended from its handle entry. FSLR stock is bouncing from its 10-week line, offering a new buying opportunity.
Array Technologies is also a TAN component. ARRY stock jumped 8.3% to 23.55, just below a 23.60 cup-with-handle buy point. But shares are 12.7% above the 21-day line and 26% above the 50-day, making an ARRY stock buy riskier, especially in the current market.
Tesla Vs. BYD: Which EV Giant Is The Better Buy?
TSLA stock fell 2.6% to 156.80 on Wednesday. Shares are now down 12.4% for the week, continuing to set two-year lows. Tesla stock peaked at 414.46 in November 2021.
TSLA stock fell 2% in premarket trade.
Late Wednesday, Elon Musk disclosed that he sold nearly 22 million Tesla shares for about $3.6 billion in the three days ended Dec. 14. Musk has sold more than $39 billion in Tesla stock since shares peaked in November 2021.
Trading volume has been especially heavy this week, with Tuesday’s trading the most in 13 months.
Earlier Wednesday, Goldman Sachs cut its TSLA stock price target and lowered its Tesla deliveries forecast for Q4. Morgan Stanley sees Tesla stock as a top pick for 2023, but warned that “the brakes are screeching on EV demand” overall.
If you covered up the TSLA ticker and just looked at the chart, you would just move on.
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Market Rally Analysis
The past two days are a great example that it’s not the news, it’s the market’s reaction to the news.
On Tuesday, a cooler-than-expected CPI inflation report sent stocks flying at the open, but they quickly slashed gains.
On Wednesday afternoon, the central raised its peak Fed rate forecast more than expected. Fed chief Powell made it clear that inflation needs to fall a lot more, though he also made more-dovish signals. The major indexes sold off hard, but then slashed losses, briefly turning positive before fading again.
The S&P 500 index, above its 200-day line for a second straight session, failed to close above that key level, this time reversing lower. But it did find support at the 21-day line, which is closing the gap with the 200-day.
The Dow Jones and Nasdaq also tested their 21-day lines successfully. The Russell 2000, which has become a lagging index, fell back toward its 50-day line.
Despite the disappointment since Tuesday’s opening highs, the major indexes are all up about 1.6% for the week, while the Russell 2000 is 1% higher.
The stock market often has a second-day reaction to Fed meetings, especially with so much in flux. Dow Jones futures suggest that’s happening.
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What To Do Now
The stock market rally isn’t giving any reason to add exposure. Previously, the indexes would at least have a strong session to lure investors in, then chop them up with steady losses over the next several sessions.
But right now the major indexes can’t hold a gain.
If you buy on strength, there’s a good chance you’re buying right at a near-term top. If you’re buying on weakness, you might be jumping onto a sinking ship.
Better to wait for the major indexes to show signs of a sustained market rally. That would involve the S&P 500 getting above its 200-day line and then all the major indexes clearing their Dec. 1 high. Even in that positive scenario, investors should add exposure carefully.
Read The Big Picture every day to stay in sync with the market direction and leading stocks and sectors.
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