S&P 500 Surges Above Key Level On Fed Chief Powell, But Inflation, Jobs Report Loom

Dow Jones futures were little changed overnight, along with S&P 500 futures and Nasdaq futures. Salesforce.com headlined overnight earnings but investor focus was on Thursday’s PCE inflation report after Fed chief Jerome Powell triggered a tech-led stock market rally on Wednesday.




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The pace of rate hikes could begin to slow at the December meeting, Fed chief Powell said on Wednesday, providing clearer support for a modest hike at the upcoming meeting. But Powell maintained his view that the fed funds rate would likely reach 5% or more. The current fed funds rate range is 3.75%-4%. Powell also noted that many of the factors driving inflation are diminishing. The Fed chief, who has suggested a recession may be necessary, said a “soft landing” is still possible.

The Nasdaq is leading the way, with Apple (AAPL), Microsoft (MSFT), Nvidia (NVDA), Tesla (TSLA) and Google parent Alphabet (GOOGL) all outperformed the composite. Notably, the S&P 500 index rose to clear the 200-day moving average, a key resistance area.

On Thursday, investors will get the October PCE price index, with the November jobs report due Friday morning.

So while Wednesday’s action is encouraging, investors should wait for the market’s reaction to the Fed’s critical data.

Primary Income

Salesforce.com (CRM), Snowflake (SNOW) and Box (BOX) leads many software revenue reports. Pure Savings (PSTG) and Victoria’s Secret (VSCO) also reported.

CRM stock fell sharply in overnight trade as Salesforce earnings topped but guidance was light. Co-CEO Bret Taylor will step down, leaving Marc Benioff as sole CEO. SNOW stock initially fell in long-term action on Snowflake’s weak earnings guidance, but cut losses. Box stock is little changed as EPS has just topped and sales have been slightly off.

PSTG stock rose slightly overnight after Pure Storage topped Q3 views and raised guidance. Shares closed up nearly 1% after plunging intraday on weak results and guidance from NetApp (NTAP). VSCO stock dipped slightly as Victoria’s Secret earnings topped but sales just fell.

Early Thursday, Dollar General (DG) and Kroger (KR) is on tap. Chinese EV makers No (NIO), Li Auto (LI) and Xpeng (XPEV) reported November trading, with stocks and other Chinese names surging on Wednesday as Covid reopened.

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Inflation Report

The Commerce Department will release the PCE price index, the Fed’s favorite measure of inflation, at 8:30 am ET as part of the income and spending report.

The October PCE price index should show a 0.4% increase compared to September. Annually, PCE inflation should cool to 6% from 6.2% in September Core PCE, which excludes food and energy, is expected to rise 0.3%. The core PCE inflation rate was seen to decrease to 5% from September’s 5.1%.

The PCE inflation report, along with the November jobs report on Friday, will help shape Fed rate hike expectations. The November consumer price index will be released on December 13, a day before the announcement of the December Fed meeting.

On Wednesday, ADP reported a sharp slowdown in private sector hiring in November. Also, the JOLTs survey showed that job openings fell more than expected in October. Q3 GDP growth was revised higher than expected, along with the inflation gauge in the report.

Dow Jones Futures Today

Dow Jones futures were virtually unchanged compared to fair value, with CRM stock a drag among the blue chips. S&P 500 futures and Nasdaq 100 futures were flat.

The 10-year Treasury yield fell 8 basis points to 3.62%.

Remember that overnight action in the Dow futures and elsewhere does not necessarily translate into actual trading in the next regular stock market session.


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Stock Market Rally

The stock market rally was mixed for much of Wednesday’s session, then picked up by Fed chief Powell’s comments, which closed out the long session.

The Dow Jones Industrial Average showed up 2.2% in stock market trading on Wednesday. The S&P 500 index jumped 3.1%. The Nasdaq composite jumped 4.4%. The small-cap Russell 2000 rose 2.7%.

Apple stock rose 4.9% and Google stock gained 6.1%, both back to their 50-day highs. Microsoft stock and Nvidia, already above their 50-day lines, jumped 6.2% and 8.2%, respectively. Tesla stock ran 7.7% higher, snapping its 21-day streak.

US crude oil prices fell 3% to $80.55 per barrel, but were down 6.9% on the month. The prospect of China’s Covid reopening also lifted copper futures.

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Treasury Bonds And Fed Rate Hike Odds

The 10-year Treasury yield returned lower, falling 5 basis points to 3.7%. The two-year Treasury yield, which is more closely tied to Fed policy, fell to 4.33%, although Powell expected a peak fed funds rate of at least 5%.

The odds of a 50-basis-point Fed rate hike are now around 79% compared to 66% after Tuesday. Markets still see another half-point move as a slight favorite in February, but the odds of a quarter-point move top out at 45%.


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ETFs

Among the best ETFs, the Innovator IBD 50 ETF (FFTY) rose 1.8%, while the Innovator IBD Breakout Opportunities ETF (BOUT) rose 2%. The iShares Expanded Tech-Software Sector ETF (IGV) popped 4.4%, with Microsoft and CRM stocks both major components. The VanEck Vectors Semiconductor ETF (SMH) jumped 5.7%, where Nvidia stock is a top holding.

The SPDR S&P Metals & Mining ETF (XME) advanced 3.75% and the Global X US Infrastructure Development ETF (PAVE) rose 2.4%. The Energy Select SPDR ETF (XLE) rose 0.5% and the Financial Select SPDR ETF (XLF) rose 1.7%. The Health Care Select Sector SPDR Fund (XLV) added 2.4%.

Reflecting the more speculative stocks in the story, the ARK Innovation ETF (ARKK) rose 7.7% and the ARK Genomics ETF (ARKG) 6.5%. Tesla stock remains a major holding in Ark Invest’s ETFs.


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Market Rally Analysis

The stock market rally made a big, strong move on Wednesday’s heavy volume on Fed chief Powell’s comments.

The S&P 500 index rebounded from near its 21-day line to the upper 4,000 level and moved above the 200-day line for the first time in seven months.

The Nasdaq composite, the laggard of the market rally, led the upside Wednesday. It retook its 21-day line and the 11,000 level to resolve the two-month closing high. The stock of Apple, Microsoft, Google, Nvidia and Tesla had strong gains on Wednesday, but it is not clear that any of them will be the leaders of the current uptrend.

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The Russell 2000, which broke a 21-day intraday line, came back to recover its 200-day. The Dow Jones, which led the current market rally, returned to a fresh seven-month high.

The advancers defeated the losers with wide victories. Many top stocks that were under pressure lifted on Wednesday.

While there was plenty of positive action on Wednesday, the S&P 500 remained below its 200-day moving average. Thursday’s October PCE inflation report and Friday’s November jobs report could reinforce Wednesday’s bullish bounce or trigger a bearish retreat.

Remember that today’s market rally has many big gains in one day, but struggles to improve in the following days or weeks.


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What To Do Now

The stock market rally had a strong session, with major indexes and leading stocks making encouraging moves.

Investors may be tempted to increase exposure to Wednesday, and doing so would be a good idea.

But good reasons remain not to increase exposure. The S&P 500 is above its 200-day line, but not like this. Doing so likely means topping a long, declining-top trendline on a weekly chart. Deciding to break above this area would be a strong signal that the current uptrend is more than just a bear market rally.

But that will require a positive reaction to the upcoming PCE inflation data and jobs report.

Investors should work aggressively on their watchlists, looking at promising stocks from various sectors. But definitely stay engaged. The market rally may be at an inflection point, but where will it turn?

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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