Dow Jones futures rose slightly overnight, along with S&P 500 futures and Nasdaq futures, with Nvidia and Cisco earnings in focus.
Stock market rally retreats amid weakness market (TGT) earnings and holiday guidance, as well Micron Technology (in) cut memory chip production plans. The bond market is flashing the risk of a more pronounced recession with the 10-year Treasury yield continuing to fall while short-end rates hold high.
NVDA shares rose modestly in overnight trade, following mixed earnings and guidance.
CSCO stock rose 4% in the action added as Cisco topped the Q1 fiscal performance and guided up on income. Cisco shares dipped 1.1% on Wednesday, trading between its 50-day and 200-day lines. IBD share price changes Arista Network (SIDE) rose slightly in Cisco’s earnings.
SQM earnings are still due tonight. SQM shares fell 2.6% on Wednesday, down more than 10% this week amid lithium price issues. The Chilean lithium-and-fertilizer giant is in one the base of the cup with 115.82 buy points. It can be used on the handle.
Chinese e-commerce giant Ali Baba (father) and US department store chains Macy’s (M) and Kohl’s (KSS) is scheduled for early Thursday. BABA shares fell modestly on Wednesday, but after soaring 11% on Tuesday. Shares of Macy’s and KSS fell Wednesday on Target’s holiday alert.
Dow Jones Futures Today
Dow Jones futures rose 0.2% vs fair value. S&P 500 futures rose 0.2%. Nasdaq 100 futures gained 0.3%. CSCO stock is a component of the Dow Jones, S&P 500 and Nasdaq, but Nvidia is a larger weight in the S&P 500 and Nasdaq.
Republicans have retaken control of the House of Representatives, according to several media outlets. But it will be a wafer-thin majority, far less than expected before Election Day.
Stock Market Rally
The stock market rally lost ground Thursday, with small caps and techs leading the decline.
The Dow Jones Industrial Average dipped 0.1% on Wednesday’s stock market trading. The S&P 500 index gave up 0.8%. The Nasdaq composite slid 1.5%. The small-cap Russell 2000 retreated 1.8%.
US crude oil prices fell 1.5% to $85.59 per barrel. Natural gas futures rose 2.8%.
Treasury Yield Curve Flashes Recession Risk
The 10-year Treasury yield tumbled 11 basis points to 3.69%, the lowest since early October and down from 4.15% just a week earlier. Benchmark Treasury yields are now below the current FED funds rate range of 3.75%-4%, and the Fed is expected to hike rates by 50 basis points to 4.25%-4.5% next month.
Two-year Treasury yields, more closely tied to Fed policy, were flat at 4.36%, while the three-month rate was at 4.23%. The inversion of the rising yield curve between three-month and 10-year Treasuries is the highest since the brief period at the end of 2019. It points to the rising risk of a recession, or the most negligible economic growth in 2023.
Fed chief Jerome Powell and some of his colleagues have indicated that a recession may be necessary to control inflation, although other policymakers see a decent chance of a soft landing.
The ever-inverted yield curve comes amid a strong labor market and strong retail sales report for October.
including The best ETFsInnovator IBD 50 ETF (FFTY) fell 1.7%, while the Innovator IBD Breakout Opportunities ETF (out) lost just over 1%. iShares Expanded Tech-Software Sector ETFIGV) lost 2.1%, with many cloud software names having a bad session. VanEck Vectors Semiconductor ETFSMH) slumped 3.6%, with Nvidia stock and Micron the main component.
SPDR S&P Metals & Mining ETFXME) slid slightly more than 2% and the Global X US Infrastructure Development ETF (Save) down 0.5%. US Global Jets ETFJETS) gave up 2.4%. SPDR S&P Homebuilders ETFXHB) retreated 1.4%. The Energy Select SPDR ETFAxle) down 2% and the Financial Select SPDR ETF (45) dipped 0.5%. The Health Care Select Sector SPDR Fund (XIV) finished just below break-even.
Nvidia earnings missed Q3 performance, but income fell less than feared. Demand for data-center chips remains strong. Gaming revenue plunged, but not quite as bad as feared. Blind chip led slightly down in Q4 sales.
Nvidia shares rose 2% in active overnight trading. Shares fell 4.5% to 159.10 on Wednesday. But NVDA stock has surged since hitting the bear market low of 108.13 on Oct. 13, on hopes that the business will improve down the road. The chip giant has moved above its 50-day line but is still below its 200-day.
Nvidia stock has no buying point in sight. Ideally, it will rally above the 200-day line and forge a new base.
Tesla shares fell 3.9% on Wednesday to 186.92. While the two-year high and low of 177.12 was set on Nov. 9, TSLA stock is hitting resistance in the 10-day moving average. Buta EV has not closed above its 21-day line since Sept. 21.
Other megacaps have struggled, however apples (AAPL), Microsoft (MSFT) and its parent Google Sundanese script (Google) are above their 50-day moving averages, while even Facebook-parent Platform Meta (map) is above the 21-day line.
Meanwhile, other EV stocks look as bad or worse than Tesla. Also Twitter CEO Elon Musk’s reign could weigh on TSLA stock in several ways.
Musk testified Wednesday in a court case over 2018 Tesla stock options that account for some $50 billion of his wealth. He indicated that he will not remain the head of Twitter permanently.
Market Rally Analysis
The stock market rally arguably was due to a pause or a pullback, and that’s what happened on Wednesday.
The Dow Jones held comfortably above the 200-day line, pausing just below its August short-term highs. The S&P 500 looks pretty normal, with modest declines, not far from the 200-day line.
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 undercut Monday’s intraday low.
Meanwhile, some stocks that flashed buy signals in the past few sessions fell again on Wednesday. Growth played out broadly while defensive names rebounded and defensive growth stocks held back, though many retailers missed out on Target’s earnings.
If the market rallies in the future, Wednesday’s Map will soon be forgotten. But if the Nasdaq breaks below 50 days and leading stocks come under more pressure, it will be worrisome.
While markets have focused, of course, on Fed policy, there are other concerns. Still, the cumulative effect of the Fed’s rate hikes this year is taking a toll on the economy. And the impact will continue months after the rate hike is finally over.
The inverted yield curve reflects the rising risk of recession.
Even now, the combination of high inflation and weakening demand is taking a significant toll. Target earnings show that, even rivals Walmart (WMT) has strong results and guidance. Inflation may fade in the coming year, but that doesn’t mean the outlook for corporate profits and stock prices is bright.
What To Do Now
Wednesday’s action offers reasons why investors should be cautious about adding exposure quickly. Buying a bunch of new positions in one day can backfire if the market pulls back, like it did on Wednesday. It is better to add exposure slowly, assuming the market rally and your position is progressing.
The stock market rally is still in good shape, but prone to big swings, sector rotations and surprise earnings. It is still unclear which stocks and sectors will lead. So don’t concentrate too much on a particular sector or theme.
But you want to regularly update your watchlist, casting a wide net.
Early entry is still important. Traditional buy points, especially when seen above the 50-day line, have not fared well.
Investors still want to take partial profits when they get quick profits in stocks. It can give you the confidence to hold the remaining stake for longer and will protect your portfolio i.e. travel stocks.
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.
You may also like: