Dow Jones futures edged higher overnight, along with S&P 500 futures and Nasdaq futures, with Nvidia and Cisco earnings in focus.
The stock market rally retreated amid weak Target (TGT) earnings and holiday guidance, as well as Micron Technology (MU) cutting memory chip production plans. The bond market is flashing brighter recession risks with the 10-year Treasury yield continuing to tumble while short-end rates hold up high.
EV giant Tesla (TSLA) retreated, showing the weakest recent performance among the megacap stocks.
Nvidia (NVDA), lithium giant Sociedad Quimica y Minera de Chile (SQM) and Cisco Systems (CSCO) headlined Wednesday night earnings.
NVDA stock climbed modestly in overnight trade, following mixed earnings and guidance.
CSCO stock rose 4% in extended action as Cisco topped fiscal Q1 views and guided up on revenue. Cisco stock dipped 1.1% on Wednesday, trading between its 50-day and 200-day lines. IBD Leaderboard stock Arista Networks (ANET) rose slightly on the Cisco earnings.
SQM earnings are still due tonight. SQM stock fell 2.6% on Wednesday, down more than 10% this week amid lithium price concerns. The Chilean lithium-and-fertilizer giant is in a cup base with a 115.82 buy point. It could be working on a handle.
China e-commerce giant Alibaba (BABA) and U.S. department store chains Macy’s (M) and Kohl’s (KSS) are due early Thursday. BABA stock fell modestly Wednesday, but after soaring 11% on Tuesday. Macy’s and KSS stock tumbled Wednesday on Target’s holiday warning.
Dow Jones Futures Today
Dow Jones futures rose a fraction vs. fair value. S&P 500 futures edgedhigher. Nasdaq 100 futures gained 0.2%. CSCO stock is a Dow Jones, S&P 500 and Nasdaq component, but Nvidia is a bigger weight on the S&P 500 and Nasdaq.
The 10-year Treasury yield advanced 3 basis points to 3.72%.
Crude oil futures fell 1%.
Republicans have retaken control of the House, according to multiple media outlets. But it will be a wafer-thin majority, far less than expected before Election Day.
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 lost ground Thursday, with small caps and techs leading the decline.
The Dow Jones Industrial Average dipped 0.1% in 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%.
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 tumbled 11 basis points to 3.69%, the lowest since early October and down from 4.15% just one week earlier. The benchmark Treasury yield is now below the current fed funds rate range of 3.75%-4%, with the Fed expected to hike rates by 50 basis points to 4.25%-4.5% next month.
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 steepening yield curve inversion between the three-month and 10-year Treasuries is the highest since a brief period in late 2019. That points to rising recession risks, or at best negligible economic growth in 2023.
Fed chief Jerome Powell and some of his colleagues have signaled that a recession may be necessary to bring inflation under control, though other policymakers see a decent chance of a soft landing.
The ever-inverted yield curve comes amid still-robust labor markets and a strong retail sales report for October.
Among the best 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%, with many cloud software names having a bad session. The VanEck Vectors Semiconductor ETF (SMH) slumped 3.6%, with Nvidia stock and Micron major components.
SPDR S&P Metals & Mining ETF (XME) slid slightly more than 2% and the Global X U.S. Infrastructure Development ETF (PAVE) fell 0.5%. U.S. Global Jets ETF (JETS) gave up 2.4%. SPDR S&P Homebuilders ETF (XHB) retreated 1.4%. The Energy Select SPDR ETF (XLE) declined 2% and the Financial Select SPDR ETF (XLF) dipped 0.5%. The Health Care Select Sector SPDR Fund (XLV) ended just below break-even.
Reflecting more-speculative story stocks, ARK Innovation ETF (ARKK) tumbled 5.15% and ARK Genomics ETF (ARKG) 3.7%. Tesla stock remains a major holding across Ark Invest’s ETFs.
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Nvidia earnings missed Q3 views, but revenue fell less than feared. Data-center chip demand remained strong. Gaming revenue plunged, but not quite as badly as feared. The chip giant guided slightly lower on Q4 sales.
Nvidia stock rose 2% in active overnight trade. Shares declined 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 down the road. The chip giant has moved well above its 50-day line but is still below its 200-day.
Nvidia stock does not have a buy point in sight. Ideally, shares would rally above the 200-day line and forge a new base.
Tesla stock fell 3.9% on Wednesday to 186.92. While above its two-year low of 177.12 set on Nov. 9, TSLA stock is hitting resistance at the 10-day moving average. The EV giant hasn’t closed above its 21-day line since Sept. 21.
Other megacaps have struggled, but Apple (AAPL), Microsoft (MSFT) and Google parent Alphabet (GOOGL) are above their 50-day moving averages, while even Facebook-parent Meta Platforms (META) is above its 21-day line.
Meanwhile, other EV stocks look as bad or worse than Tesla. Also CEO Elon Musk’s Twitter reign could be weighing on TSLA stock in various ways.
Musk testified Wednesday in a court case over 2018 Tesla stock options that account for some $50 billion of his wealth. He hinted that he will not remain Twitter’s chief permanently.
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Market Rally Analysis
The stock market rally arguably was due for a pause or a pullback, and that’s what happened Wednesday.
The Dow Jones held comfortably above the 200-day line, pausing just below its August short-term highs. The S&P 500 looks fairly normal, with a modest 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 undercut Monday’s intraday low.
Meanwhile, several stocks that flashed buy signals in the past few sessions came back down on Wednesday. Growth plays faltered broadly while defensive names rebounded and defensive growth stocks held up, though many retailers tumbled on Target’s earnings miss.
If the market rallies in the near future, Wednesday’s action will soon be forgotten. But if the Nasdaq breaks below its 50-day and leading stocks come under more pressure, that will be worrisome.
While markets have been focused, rightly, on Fed policy, there are other concerns. Still, the cumulative effect of Fed rate hikes this year is taking a toll on the economy. And the impact will continue several months after rate hikes ultimately end.
The inverted yield curve reflects rising recession risks.
Even now, the combination of high inflation and weakening demand are taking a significant toll. Target earnings showed that, though rival Walmart (WMT) had strong results and guidance. Inflation may slowly fade in the coming year, but that doesn’t mean the outlook for corporate profits and share prices is bright.
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What To Do Now
Wednesday’s action offers a reason why investors should be cautious about rapidly adding exposure. Buying a bunch of new positions on one day can backfire if the market retreats, as it did Wednesday. Better to add exposure gradually, assuming the market rally and your positions are making progressing.
The stock market rally is still in good shape, but is prone to big swings, sector rotations and earnings surprises. It’s still not clear which stocks and sectors will lead. So don’t get too concentrated in a particular sector or theme.
But you do want to regularly update your watchlists, casting a wide net.
Early entries are still important. Traditional buy points, especially if noticeably above the 50-day line, have not worked out especially well.
Investors may still want to take partial profits when they get a quick gain in a stock. That can give you the confidence to hold the remaining stake for longer and will protect your portfolio is the stock round-trips.
Read The Big Picture every day to stay in sync with the 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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