Dow Jones futures fell sharply early Thursday, along with S&P 500 futures and Nasdaq futures, as investors continued to consider Wednesday’s Federal Reserve news. Weak Chinese economic data and upcoming US economic reports were also targeted, along with the latest sales of Elon Musk’s Tesla.
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The stock market rally returned to lows Wednesday after the Federal Reserve penciled in 5.1% as a new peak rate target and Fed chief Jerome Powell demanded “more evidence” that inflation is under control.
But stocks pared losses in whipsaw action as investors weighed in on Powell’s other comments and hoped for a slower rate hike to begin 2023. Tesla (TSLA) CEO Elon Musk revealed late Wednesday that he sold more than $3.5 billion worth of TSLA stock this week, as shares fell to hit new bear-market lows. Apple (AAPL) fell below its 50-day moving average.
But solar stocks are strong, with the Invesco Solar ETF (TAN) flashing a buying opportunity, as Enphase Energy (ENPH), SolarEdge Technologies (SEDG), First Solar (FSLR) and Array Technologies (ARRY) all get up.
Fed Rate Increase, Maximum Rate
The central bank raised the fed funds rate by 50 basis points, to 4.25%-4.5% on Wednesday afternoon, as expected. But policy makers, in the new quarterly projection, also now see a peak rate of 5.1%, from 4.6% at the September Fed meeting. Fed chief Powell has indicated in recent weeks that the peak rate is likely to be higher. But 5.1% was above market expectations, especially after Tuesday’s relatively good inflation report.
Fed Chief Powell Hawkish, Dovish
Powell, speaking shortly after the announcement and projections at the Fed meeting, said the full effects of the Fed’s rate hikes this year have yet to be felt, “but we still have some work to do.” The Fed chief noted the “welcome reduction” in prices obtained in the last two CPI reports, but said policymakers need “more evidence. with confidence that inflation is on a continued downward path.”
Powell did not rule out a further rate hike, up to a quarter point in February. But where the highest rate of feed funds is, and how long it stays high, is more important, he stressed. Remarkably, Powell does not see any rate cuts in 2023.
But he also said that “Our policy has reached a good place now.”
Markets are pricing in a 74% chance of a quarter-point Fed rate hike, to a 4.5%-4.75% range, up from 60% on Tuesday. In particular, investors expected a quarter-point increase in late March, but now see a decent chance of no movement.
The Fed continues to see a slowdown in growth in 2023, not an actual recession.
The major indexes, all modest heading into the announcement of the Fed meeting and Powell’s speech, turned lower in quick trading. For the second consecutive session, the S&P 500 index moved above its 200-day moving average but closed below key levels.
Investors should be cautious about increasing exposure in the current market, with indices volatile and close to key levels.
Dow Jones Futures Today
Dow Jones futures fell 0.7% versus the fair value. S&P 500 futures fell 0.95% and Nasdaq 100 futures fell 1.25%.
Crude oil futures rose slightly.
China’s retail sales fell 5.9% in November compared with a year earlier, worse than expected and worsening from a 0.5% decline in October. Industrial production rose 2.2%, with growth slowing more than expected from 5% in October.
China’s Covid lockdowns have damaged the economy. Covid rules have been loosening rapidly in recent weeks, but now China is bracing for more infections.
Investors will get US retail sales data for November, the Philly Fed manufacturing index for December and weekly jobless claims, at 8:30 am ET.
Remember that overnight action in the Dow futures and elsewhere does not necessarily translate into actual trading in the next regular stock market session.
Join IBD’s experts as they analyze stock market rally action on IBD Live
Stock Market Rally
The stock market rally rose leading up to the Fed meeting announcement, then reversed lower in a volatile move for the rest of the session.
The Dow Jones Industrial Average fell 0.4% in stock market trading on Wednesday. The S&P 500 index yielded 0.6%. The Nasdaq composite lost 0.8%. The small-cap Russell 2000 yielded 0.7%.
Apple stock sank 1.55% to 143.21, back below the 50-day moving average.
US crude oil prices rose 2.5% to $77.28 per 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) slipped 0.1%. The iShares Expanded Tech-Software Sector ETF (IGV) lost 0.2%. The VanEck Vectors Semiconductor ETF (SMH) fell 1.7%.
Reflecting the more speculative stocks in the story, the ARK Innovation ETF (ARKK) yielded 1% and the ARK Genomics ETF (ARKG) 0.7%. Tesla stock is a major holding in Ark Invest’s ETFs.
The SPDR S&P Metals & Mining ETF (XME) retreated 0.9%. The SPDR S&P Homebuilders ETF (XHB) fell 0.5%. The Energy Select SPDR ETF (XLE) returned 0.6% and the Financial Select SPDR ETF (XLF) 1.25%. The Health Care Select Sector SPDR Fund (XLV) rose 0.2%.
Solar Stocks
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, so TAN is a great way to play the sector with little individual stock risk.
Enphase Energy, First Solar and SEDG stock are the three largest 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 has also been extended since entering its holdings. FSLR stock has bounced off its 10-week line, offering a new buying opportunity.
Array Technologies is also a component of TAN. ARRY stock jumped 8.3% to 23.55, just below the 23.60 cup-with-handle buy point. But the shares are 12.7% above the 21-day line and 26% above the 50-day, which makes an ARRY stock purchase more risky, especially in the current market.
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Tesla Stock
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 rose to 414.46 in November 2021.
TSLA stock fell more than 2% in premarket trade.
On Wednesday, Elon Musk disclosed that he sold nearly 22 million shares of Tesla for more than $3.5 billion in the three days ending December 14. Musk has sold more than $39 billion of Tesla stock since the shares are up in November 2021.
Trading volume was particularly heavy this week, with Tuesday’s trading the highest in 13 months.
On Wednesday, Goldman Sachs cut its TSLA price target and lowered Tesla’s delivery forecast for Q4. Morgan Stanley sees Tesla stock as a top pick for 2023, but warns that “the brakes are screeching on EV demand” overall.
If you cover the TSLA ticker and just look at the chart, you’ll just keep going.
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Market Rally Analysis
The last two days are a good example that it’s not the news, it’s the market reaction to the news.
On Tuesday, a cooler-than-expected CPI inflation report sent stocks flying at the open, but they quickly pared the gains.
On Wednesday afternoon, the central raised its peak Fed rate forecast more than expected. Fed chairman Powell made it clear that inflation should fall further, although he also made more dovish signals. The major indexes sold off sharply, but then pared losses, briefly turning positive before fading again.
The S&P 500 index, above its 200-day line for the second straight session, failed to close above key levels, this time reversing lower. But it found support at the 21-day line, which closed the gap of 200 days.
The Dow Jones and Nasdaq also successfully tested their 21-day lines. The Russell 2000, which has been a lagging index, fell back to its 50-day line.
Despite the disappointment since the opening of the highs on Tuesday, the major indexes are all about 1.6% for the week, while the Russell 2000 is 1% higher.
The stock market usually has a second day of reaction to Fed meetings, especially with a lot of progress.
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What To Do Now
The stock market rally does not provide any reason to increase exposure. In the past, indices had at least one strong session to attract investors, then cut it with consistent losses in subsequent sessions.
But for now the major indices are unable to hold a profit.
If you buy on strength, there’s a good chance you’ll be buying on the near high. If you’re buying out of weakness, you may be jumping on 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 rising above its 200-day line and then all the major indexes clearing their December 1 highs. Even in that positive scenario, investors should add more cure exposure.
Read the Big Picture every day to stay in tune 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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