Dow Jones futures open Sunday night, along with S&P 500 futures and Nasdaq futures. Even with a solid finish in Friday’s whiplash session, the stock market rally suffered significant damage last week as major indices slumped on hawkish comments from Fed Chair Jerome Powell.
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The Nasdaq had its worst week since January as megacaps plummeted and cloud software crashed.
Apple (AAPL), Amazon.com (AMZN) and Google parent company alphabet (GOOGL) all down more than 10% for the week, with Facebook parents meta platforms (META), Tesla stock and Microsoft stock not far behind. Google Stock Meta, Amazon.com (AMZN) and Microsoft (MSFT) hit all bear market lows. Apple stock and Tesla (TSLA) don’t, but they’re close.
In the meantime, Twilio (TWLO) and Atlasian (TEAM) plummeted on Friday due to disappointing results and forecasts and is down more than 40% this week. A whole host of other software names fell, with or without revenue.
A market rally trying to fight the Fed while the big tech sector plummets? That’s a big challenge. While there are some stocks and sectors showing strength, investors should be extremely cautious in the current environment.
Dow Jones futures today
Dow Jones futures open at 6:00 p.m. ET on Sunday, along with S&P 500 futures and Nasdaq 100 futures.
Keep in mind that overnight action in Dow futures and elsewhere doesn’t necessarily translate to actual trading in the next regular trading session.
Join IBD experts as they analyze actionable stocks in the stock market rally on IBD Live
stock market rally
The stock market rally started the week in decent fashion but then sold off on Wednesday afternoon on hawkish comments from Fed Chair Jerome Powell. The major indices continued to fall on Thursday. Shares tumbled on Friday after a mixed jobs report but ultimately closed solidly higher on the day.
The Dow Jones Industrial Average was still down 1.4% in trading last week. The S&P 500 index fell 3.3%. The Nasdaq Composite plunged 5.7%, its worst loss since the week ended Jan. 21. Small-cap Russell 2000 fell 2.4%.
The 10-year government bond yield rose 15 basis points to 4.16%. The 10-year yield resumed its rise after ending a 12-week winning streak and briefly traded back around 4%.
The dollar rose 0.2% on the week but tumbled 1.9% on Friday, its biggest one-day drop in years. That probably contributed to the rise in stock markets on Friday.
Markets now see a 61.5% chance of a 50 basis point hike at the December Fed meeting. The consumer price index for October is due on Thursday. The November jobs and CPI reports will be released ahead of the Fed’s December 14 rate hike decision.
US crude oil futures rose 5.4% last week to $92.61 a barrel. Natural gas shot up almost 13%.
Technical wreck
Apple stock, which rallied to its 200-day moving average last week, fell 11.15% last week to 138.38. AAPL stock is within a penny of its October low, although it is still a little way off its June bear market lows. Microsoft slipped 6.1%, Google 10.1%, Amazon 12%, and META stock 8.5%, all to multi-year lows. Tesla stock plunged 9.2% this week, getting close to its intraday low of Oct. 24 on Friday. This is after a strong start to the week and an intraday reading of 237.40 on Tuesday.
These are dark days for cloud software. Here are just a few examples: Atlassian stock plummeted 29% on Friday and 38% on the week. Twilio stock plunged nearly 35% on Friday and 43.5% on the week. snowflake (SNOW), which will not report for a couple of weeks, is down 17% this week.
In the meantime, Fortinet (FTNT) tumbled 17.5% on the week after weak billing forecasts wiped out strong earnings and an upbeat sales outlook. Paycom (PAYC) plunged 10.3% despite solid results and guidance.
Businesses looking to cut costs can rein in software spending when setting budgets for 2023.
ETFs
Among the best ETFs, the Innovator IBD 50 ETF (FFTY) fell 1.2% last week, while the Innovator IBD Breakout Opportunities ETF (BOUT) lost 2%. The iShares Expanded Tech-Software Sector ETF (IGV) plunged 10.2%, with MSFT shares taking a key position. VanEck Vectors Semiconductor ETF (SMH) fell just 0.7% after rising 4.65% on Friday to close high in the weekly range.
The SPDR S&P Metals & Mining ETF (XME) is up 2% over the past week. The Global X US Infrastructure Development ETF (PAVE) fell 0.1%. The US Global Jets ETF (JETS) edged up 0.3%. The SPDR S&P Homebuilders ETF (XHB) fell 5%. The Energy Select SPDR ETF (XLE) climbed 2.4%, just below an eight-year high. The Financial Select SPDR ETF (XLF) fell 0.9%. The Health Care Select Sector SPDR Fund (XLV) fell 1.5%.
The ARK Innovation ETF (ARKK) is down 9.4% last week and the ARK Genomics ETF (ARKG) is down 4.65%. Tesla stock is a key position in Ark Invest’s ETFs.
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Analysis of the market rally
The stock market rally had a bad week with a hawkish Fed and often weak earnings weighing on major indices. The Dow Jones, which has been leading the market’s uptrend, saw the slightest decline but moved back below the 200-day moving average. The Russell 2000 encountered resistance near the 200-day moving average but rallied on Friday to close above the 50-day moving average. The S&P 500 has broken the 50-day mark.
The Nasdaq Composite, which never touched the 50-day moving average, fell the most, closing below its subsequent day’s low on Wednesday, a bearish signal.
The main indices extended losses on Thursday and slumped on Friday on a mixed jobs report.
The negative market developments and major price setbacks for many stocks triggered a shift towards “market under pressure”.
The big market driver was Fed Chair Powell, who cut the bottom of the market rally by signaling a shift towards smaller rate hikes but a higher fed funds rate.
Meanwhile, megacap technologies including Apple, Tesla and Amazon suffered huge losses. Cloud software names like Atlassian and Twilio plummeted, with recent earnings and forecasts being key factors.
Chips haven’t had a terrible week in relative terms, but few names are trading near highs.
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There are several resilient areas of the market. Overall, the healthcare sector is strong. Energy stocks are doing well, including a broad range of oil stocks, LNG stocks and coal miners, as well as some solar stocks.
Lithium and some steel games are doing well. Infrastructure companies for the energy, utilities, and telecom industries are a bright area. Networking companies in general are a rare area of technology to lead. Some restaurants and discounters are showing strength. Various financial stocks, particularly brokers and brokerage firms, have rallied strongly.
Still, it’s hard to see a strong market rally when such huge tech sectors are teetering. It would be hard enough for the major indices to improve if the names of Apple, Google, Tesla and cloud software lag behind. But trying to move forward with those areas that are falling or crashing?
If inflation reports show a clear and meaningful decline, leading to a tapering of Fed rate hikes, then megacaps and cloud software may bottom out. However, a return to technology leadership may be a long way off. On the other hand, if the Nov. 10 CPI report shows inflation still heating up, tech stocks could drag leading sectors lower to end the market rally.
Tuesday is election day. The stock market tends to fare better with a divided government, and Republicans will retake control of the House and perhaps the Senate. But political forecasters have predicted at least one house GOP win all year, so it’s not clear if Tuesday’s actual results will be a big catalyst.
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What now
The stock market rally is under pressure. The Fed is going from fast and furious to slow and long, but it’s still hawkish. The tech sector is a trainwreck. Major indices have fallen below some key levels. The indices and benchmarks are subject to major day-to-day fluctuations.
This is not a good environment for buying stocks. Investors should try to reduce exposure, either explicitly or simply, to reduce losses on various positions.
If the market rally shows renewed strength and the S&P 500 and possibly the Nasdaq rise above their 50-day moving averages, investors could start adding exposure. But that will likely require technology to stabilize and inflation data to show some cooling.
When conditions improve you should be ready. There are a number of stocks being set up and many more not too far away. So build your watch lists, be patient and stay engaged.
Read The Big Picture every day to keep up to date 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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