Dow Jones Falls as These Bank Stocks Plunge, Fed Rates Rise; AMD falls late on guidance
Dow Jones futures were little changed after hours, as were S&P 500 futures and Nasdaq futures. AMD led key earnings reports after the close, with the Fed interest rate decision looming on Wednesday.
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The stock rally suffered solid losses on Tuesday, with the major indexes falling back from near 2023 highs, even as they found support.
Banks sold out — especially regional ones such as PacWest Bancorp (PACW), Western Alliance Bancorp (WAL) and Comerica (CMA) — as investors fear further bank failures following the collapse and sale of First Republic Bank (FRC) to JPMorgan Chase (JPM).
Energy shares plunged with crude oil prices.
Arista Networks (ANET) was the latest big revenue loser, in a bad sign for tech hardware.
Advanced Micro Devices (AMD), Super micro computer (SMCI), Alive (LTHM) and Starbucks (SBUX) reported late Tuesday. AMD and SBUX shares pulled back solidly, while SMCI shares and Livent jumped.
Wing stop (WING) and Yum brands (YUM) is on tap early Wednesday.
SMCI stocks and AMD are on the IBD 50. AMD and ANET stocks are on the IBD Big Cap 20.
Dow Jones Futures today
Dow Jones futures were flat versus fair value. S&P 500 futures were flat and Nasdaq 100 futures fell 0.1%. AMD stock is a notable Nasdaq constituent.
Keep in mind that overnight action in Dow futures and elsewhere does not necessarily translate into actual trading in the next regular session.
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Fed interest rate decision
The Federal Reserve is a near lock to raise interest rates at 2pm ET Wednesday, even with the banking crisis, largely spurred by rapid Fed tightening, far from over. A quarter-point move would bring the Fed Funds rate to 5%-5.25%. The real question is what the Fed meeting statement and Fed Chair Jerome Powell say about monetary policy going forward. Markets currently expect the Fed to take a break. But Powell will likely want to preserve the Fed’s flexibility with inflation stubbornly high.
Bank shares
Bank stocks plunged on Tuesday, accelerating from solid to sharp losses on Monday, even as they bounced off intraday lows. PACW plunged 28% and set a new record close. WAL stock gave up 15%.
Super regionals also tumbled. Comerica shares fell 12 percent, keycorp (KEY) lost 9.4% and Truest (TFC) fell 7.6%. PNC Financial Services (PNC) declined 2.3% and set a new multi-year low.
Charles Schwab ( SCHW ) gave up 3.3%. The banking giants also struggled. Bank of America (BAC) and Wells Fargo (WFC) lost 3% and 3.8%, respectively, not yet at recent lows, but not too far off either. JPMorgan shares, which flirted with a breakout Monday on its deal to buy First Republic, fell 1.6%.
The failure and sale of the First Republic clearly did not mark the end of the banking scare. PacWest last week disclosed stabilizing deposits, but it is among the hardest hit bank stocks this week.
Investors fear further bank failures that leave them with nothing. It could become a self-fulfilling prophecy, as falling bank stocks spur people to withdraw deposits at a faster rate. While regulators have made it clear that they want to protect all deposits, it only takes a few clicks to move funds to a “safe” bank.
In the longer term, the bank’s profitability and shares may struggle. Regional banks in particular are likely to have to pay far more for deposits or funding, reducing profitability, both absolute and relative compared to giants like JPMorgan. Meanwhile, the FDIC will end up charging large fees to banks, especially giants, to cover the costs of ongoing failures.
The Financial Select SPDR ETF ( XLF ) – dominated by financial giants such as JPM shares, BofA and Wells Fargo – gave up 2.3 percent. The SPDR S&P Regional Banking ETF ( KRE ) — which holds shares of PACW, Western Alliance, Comerica and many others — fell 6.3% to a 30-month low.
Key income
AMD stock fell in after-hours trading, signaling a move sharply below its 50-day mark. AMD revenue topped views, but the chip giant’s revenue and gross margin guidance for the second quarter were below consensus at the midpoint. CEO Lisa Su said “a mixed demand environment.” Shares rose 0.25% to 89.91 in Tuesday’s regular session. AMD stock had found support at the 50-day line, right around a previous buy point. A bullish move from today’s level will offer a buying opportunity.
SMCI shares jumped overnight after Super Micro earnings fell short, but the server maker led on fiscal Q4. The stock fell 0.65 percent on Tuesday. SMCI shares fell last week as the server maker reported weak preliminary results, largely due to component shortages. But shares are back above the 50-day mark in a messy area since late March.
LTHM shares bounced for a long time after the lithium producer comfortably beat its outlook and raised its full-year guidance. Livent shares rose 0.6% to 21.02 on Tuesday, below key moving averages. Albemarle (ALB), which reports on Wednesday, is more exposed to falling spot lithium prices. The ALB share rose a little late.
SBUX stock fell solidly, despite Starbucks earnings beating the view on strong same-store sales worldwide. Shares fell 0.1% on Tuesday to 114.46, holding in buy territory from a buy point of 110.93 cups, according to MarketSmith analysis. But SBUX stock may test that buy point on Wednesday.
WING shares rose 0.3% on Tuesday, also staying in buy territory. YUM shares advanced 0.5% and are slightly extended.
Stock market rally
The stock rally opened lower and accelerated losses into late morning. The major indexes then pared losses somewhat.
The Dow Jones Industrial Average fell 1.1% in Tuesday’s trading. The S&P 500 index fell 1.2 percent. The Nasdaq composite fell 1.1 percent. The small-cap Russell 2000 fell 2.1%.
The US crude oil price fell 5.3 percent to 71.66 dollars a barrel.
The 10-year Treasury yield fell nearly 14 basis points to 3.44%. The two-year Treasury yield fell 16 basis points to 3.98%. But the three-month Treasury bill rate rose to 5.24%.
ETFs
Among growth ETFs, the Innovator IBD 50 ETF ( FFTY ) fell 2.2%, with some new big losers. Innovator IBD Breakout Opportunities ETF (BOUT) fell 0.85%. The iShares Expanded Tech-Software Sector ETF ( IGV ) lost 1.4%. VanEck Vectors Semiconductor ETF ( SMH ) fell 0.9%. AMD stock is a great SMH holding.
Reflecting stocks with more speculative stories, ARK Innovation ETF ( ARKK ) gave up 2.35% and ARK Genomics ( ARKG ) retreated 3.2%.
The SPDR S&P Metals & Mining ETF ( XME ) fell 0.2%. US Global Jets (JETS) was down 0.8%. SPDR S&P Homebuilders (XHB) was down 0.4%. The Energy Select SPDR ETF (XLE) plunged 4.35% and the Health Care Select Sector SPDR Fund (XLV) fell 0.4%.
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Market rally analysis
The stock’s rally hit resistance at the 2023 highs, and sold off significantly during the day, although it came off the lows. Bank shares were the big driver, but energy plays were also big losers. Arista Networks (ANET) became the last leading stock near a buy point thanks to results.
The Nasdaq composite, with not much exposure to financials or energy, found support at the 21-day moving average. The Nasdaq 100, which includes the 100 largest non-financial Nasdaq stocks, fell just 0.9%.
The S&P 500 and Dow Jones also found support at the 21-day line.
The Russell 2000 fell to hit its worst levels since the 2023 low on March 24.
The share price rise is still under pressure. The major indexes are struggling to reach their highs in 2023. That’s not terrible, but the indexes are looking better than the broader market.
Market breadth was terrible on Tuesday, with the small rally at the end of last week apparently just a blip.
The First Trust Nasdaq 100 Equal Weighted Index ETF (QQEW) fell 1.2%, back below its 50-day line. The Invesco S&P 500 Equal Weight ETF ( RSP ) fell 1.5%, below its 50-day and ending just below the 200-day mark.
Restaurants have looked strong — including Wingstop, Starbucks and Yum Brands — heading into their earnings reports.
Drug manufacturers and biotech giants are performing well, along with medical products. It’s a good time for defensive and defensive growth names.
Hotels look interesting, too Marriott Worldwide (MAR) breaks out on earnings Tuesday. Several other hotels are in print this week, along with tour guide Booking Holdings (BKNG).
Gold stocks are doing well, but that’s usually not a good sign for the overall market or economy.
But market leadership is narrow.
Chips has struggled for the last month outside Nvidia (NVDA). AMD stock’s overnight drop signals further weakness in the chips.
The fact that the Fed has stopped raising interest rates during a banking crisis amid already slowing economic growth shows how boxed-in policymakers are. Powell knows that banking problems are a warning sign for the financial system and the economy, but fears that stoking inflation will end up being even worse.
The market reaction to the Fed meeting on Wednesday will of course be important. Of course, apple ( AAPL ) earnings are due Thursday night, with the April jobs report due Friday.
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What to do now
It’s not a great environment for adding exposure. Just as the market rally begins to hint at gaining momentum and breadth, the indexes pull back, with steep losses in many individual stocks due to earnings and sector rotation.
Investors who are in the right stocks can have good gains in 2023. Even then, it has often been important to know when to take partial or full profits.
A heavy cash position is the sensible choice, especially heading into the Fed rate decision and other big news. Investors must be flexible. A couple of good days can send the market to new heights and trigger a number of buying opportunities. A few bad days can signal a push to the sidelines.
So keep your watch lists up to date and your exit strategies ready.
Read The Big Picture every day to stay in sync with market direction and leading stocks and sectors.
Follow Ed Carson on Twitter at @IBD_ECarson for stock exchange updates and more.
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