Dow Jones futures rose slightly overnight, along with S&P 500 futures and Nasdaq futures, with Nvidia and Cisco earnings in focus.
The stock rally pulled back amid weakness Goal (TGT) earnings and holiday guidance, as well as Micron technology (MU) cut production plans for memory chips. The bond market is flashing brighter recession risks with the 1[ads1]0-year Treasury yield continuing to fall while short-term yields remain high.
EV giant Tesla ( TSLA ) retreated, posting the weakest recent performance among megacap stocks.
Nvidia (NVDA), lithium giant Chemical and Mining Society of Chile (SQM) and Cisco Systems (CSCO) headline Wednesday evening earnings.
NVDA shares rose modestly in overnight trading, following mixed earnings and guidance.
CSCO shares rose 4% in extended action as Cisco topped fiscal Q1 views and guided earnings up. Cisco shares fell 1.1% on Wednesday, trading between the 50-day and 200-day lines. IBD Leaderboard stock Arista Networks (ANET) rose slightly on Cisco earnings.
The SQM earnings are still due tonight. SQM shares fell 2.6% on Wednesday, down more than 10% this week on concerns about lithium prices. The Chilean lithium and fertilizer giant is in a cup base with a buy point of 115.82. It could be working with a handle.
China’s e-commerce giant Ali Baba (BABA) and American department store chains Macy’s (M) and Kohl’s (KSS) has an appointment early Thursday. BABA shares fell modestly on Wednesday, but after rising 11% on Tuesday. Macy’s and KSS shares fell Wednesday on Target’s holiday warning.
Dow Jones Futures today
Dow Jones futures rose 0.2% relative to fair value. S&P 500 futures rose 0.2 percent. Nasdaq 100 futures rose 0.3 percent. CSCO stock is a Dow Jones, S&P 500 and Nasdaq component, but Nvidia is a larger weight on the S&P 500 and Nasdaq.
The Republicans have taken back control of the house, according to several media. But it will be a slim majority, far less than expected before election day.
Keep in mind that overnight action in Dow futures and elsewhere does not necessarily translate into actual trading in the next regular session.
Join IBD experts as they analyze actionable stocks in the stock market rally on IBD Live
Stock market rally
The stock rally lost ground on Thursday, with small companies and technologies leading the decline.
The Dow Jones Industrial Average fell 0.1% in Wednesday’s trading. The S&P 500 index gave up 0.8 percent. The Nasdaq composite fell 1.5 percent. The small-cap Russell 2000 retreated 1.8%.
US crude oil prices fell 1.5% to $85.59 a barrel. Natural gas futures rose 2.8 percent.
Treasury Yield Curve flashing Recession risk
The 10-year Treasury yield fell 11 basis points to 3.69%, the lowest since early October and down from 4.15% just one week earlier. The benchmark Treasury rate is now below the current range of 3.75%-4%, with the Fed expected to raise 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 yield is at 4.23%. The steep inversion of the yield curve between three-month and 10-year government bonds is the highest since a brief period in late 2019. It points to increasing 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 needed to bring inflation under control, although other policymakers see a decent chance of a soft landing.
The ever-inverted yield curve comes amid continued robust labor markets and a strong retail sales report for October.
Among the top 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 poor session. The VanEck Vectors Semiconductor ETF ( SMH ) fell 3.6%, with Nvidia stock and Micron leading components.
The SPDR S&P Metals & Mining ETF ( XME ) fell a little more than 2% and the Global X US Infrastructure Development ETF ( PAVE ) fell 0.5%. The US Global Jets ETF (JETS) gave up 2.4%. The SPDR S&P Homebuilders ETF ( XHB ) retreated 1.4%. The Energy Select SPDR ETF (XLE) fell 2% and the Financial Select SPDR ETF (XLF) fell 0.5%. The Health Care Select Sector SPDR Fund (XLV) ended just below break-even.
ARK Innovation ETF ( ARKK ) reflected more speculative stock stocks, falling 5.15% and ARK Genomics ETF ( ARKG ) 3.7%. Tesla stock remains a large holding across Ark Invest’s ETFs.
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Nvidia earnings missed third-quarter showings, but revenue fell less than feared. Demand for data center chips remained strong. Gaming revenue plunged, but not quite as badly as feared. The chip giant guided slightly lower sales in the 4th quarter.
Nvidia shares rose nearly 2% in active trading overnight. Shares fell 4.5% to 159.10 on Wednesday. But NVDA stock has rallied 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, stocks would rally above the 200-day mark and forge a new base.
Tesla shares fell 3.9% on Wednesday to 186.92. While above the two-year low of 177.12 set on November 9, TSLA stock is hitting resistance at the 10-day moving average. The electric car giant has not closed above its 21-day line since September 21.
Other megacaps have struggled, however apple (AAPL), Microsoft (MSFT) and Google parent Alphabet (GOOGL) is above its 50-day moving average, while even parent Facebook 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 dilute TSLA stock in various ways.
Musk testified Wednesday in a lawsuit over Tesla stock options in 2018 that account for about $50 billion of his fortune. He hinted that he will not remain Twitter’s boss permanently.
Tesla vs. BYD: Which EV giant is the best buy?
Market rally analysis
The stock rally was undoubtedly due for a pause or a pullback, and that’s what happened on Wednesday.
The Dow Jones remained comfortably above the 200-day line, stopping just short of its short-term highs in August. The S&P 500 looks pretty normal, with a modest decline, not far from the 200-day line.
The Nasdaq remains well above the 50-day mark, but is back below its October short-term highs. The Russell 2000 fell below the 200-day mark and undershot Monday’s intraday low.
Meanwhile, several stocks that showed buy signals in recent sessions fell back on Wednesday. Growth fell sharply, while defensive names bounced back and defensive growth stocks held up, although many retailers fell over Target’s earnings miss.
If the market rises 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 rightly been focused 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 for several months after the rate hikes finally end.
The inverted yield curve reflects increasing recession risk.
Even now, the combination of high inflation and weakened demand is taking a significant toll. Target earnings showed it, even if it was a rival Walmart (WMT) had strong results and guidance. Inflation may be slowly easing in the coming year, but that doesn’t mean the outlook for corporate profits and stock prices is bright.
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What to do now
Wednesday’s action provides a reason why investors should be cautious about quickly increasing exposure. Buying a bunch of new positions in one day can backfire if the market pulls back, as it did on Wednesday. It is better to add exposure gradually, provided the market rally and your positions develop.
The share recovery is still in good shape, but is exposed to major fluctuations, sector rotations and earnings surprises. It is still not clear which stocks and sectors will lead. So don’t get too concentrated in a particular sector or theme.
But you want to update your watchlists regularly, and cast a wide net.
Early registrations are still important. Traditional buy points, especially if they are noticeably above the 50-day mark, have not worked particularly well.
Investors may still want to take partial profits when they get a quick gain in a stock. It can give you the confidence to hold the remaining stake for longer and will protect your portfolio in the event of stock cycles.
Read The Big Picture every day to stay in sync with market direction and leading stocks and sectors.
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