Dow Jones futures open Sunday evening, along with S&P 500 futures and Nasdaq futures, with the Federal Reserve meeting in focus.
The stock market suffered damaging losses last week on a surprisingly warm CPI inflation report as well as some dismal earnings reports or warnings. The major indexes slipped below their 50-day moving averages and breached some further key levels on Friday. Many leading stocks also struggled.
It is a time for investors to have minimal exposure, at most. Build watchlists of stocks that boast strong relative strength and hold key levels. Tesla (TSLA), Enphase Energy (ENPH), Celsius Holdings (CELH), Wolfspeed (ULF) and Vertex Pharmaceuticals (VRTX) all qualify.
Of course, Tesla shares, Enphase, etc. look robust now, but they may not in the coming days. Many stocks looked strong until last Tuesday. Others looked solid until Thursday or Friday.
WOLF stock is on the IBD Leaderboard watch list. Tesla, Enphase and CELH stock are on the IBD 50. ENPH stock and Vertex are on the IBD Big Cap 20.
The Fed meeting is 20-21. September. In the wake of Tuesday’s consumer price index, which showed strength everywhere outside of gasoline, markets reinforced expectations of a third Fed rate hike of 75 basis points. (There’s a slim chance of a monster 100 basis points.) Investors will be focused on what Fed policy suggests for the future.
The Fed’s quarterly estimates will signal where policymakers see the fed funds rate further out.
Right now, the market is leaning towards another rate hike of 75 basis points in November, followed by 25 or 50 basis points in December. That would push the Fed Funds target rate to either 4%-4.25% or 4.25%-4.5%, versus expectations of 3.75%-4% before the CPI report.
Fed Chairman Jerome Powell will provide his remarks after the meeting at 2:30 PM ET. Powell made it crystal clear in his August 26 Jackson Hole speech that the Federal Reserve would not repeat its mistakes of the 1970s by easing policy too quickly.
Dow Jones Futures today
Dow Jones futures open at 6 PM ET on Sunday, along with S&P 500 futures and Nasdaq 100 futures.
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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The stock market last week
The stock market suffered heavy losses in the past week, turning hard after solid gains on Monday.
The Dow Jones Industrial Average fell 4.1% in last week’s trading. The S&P 500 index fell 4.8 percent. The Nasdaq composite fell 5.5%. The small-cap Russell 2000 gave up 4.5%.
The 10-year Treasury yield rose 13 basis points to 3.45%, the seventh straight weekly increase. At one point on Friday, the 10-year yield hit 3.483%, exactly matching the 11-year high set on June 14.
U.S. crude oil futures fell 1.9% to $85.11 a barrel last week, the third straight weekly decline. Natural gas prices fell 2.7%, but after a wild week of gains and losses.
Among the top ETFs, the Innovator IBD 50 ETF ( FFTY ) fell 5% last week, while the Innovator IBD Breakout Opportunities ETF ( BOUT ) gave up 4.2%. The iShares Expanded Tech-Software Sector ETF ( IGV ) plunged 8.3%. The VanEck Vectors Semiconductor ETF (SMH) gave up 6%.
The SPDR S&P Metals & Mining ETF ( XME ) plunged 10.3% last week. Global X US Infrastructure Development ETF (PAVE) 7.5%. The US Global Jets ETF (JETS) fell 5%. The SPDR S&P Homebuilders ETF ( XHB ) fell 6.9%. The Energy Select SPDR ETF (XLE) gave up 2.7% and the Financial Select SPDR ETF (XLF) lost 3.9%. Health Care Select Sector SPDR Fund (XLV) was down 2.3%
As a result of more speculative stock stocks, the ARK Innovation ETF (ARKK) fell 4.5% last week and the ARK Genomics ETF (ARKG) fell 5.3%. Tesla stock is a large holding across Ark Invest’s ETFs.
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Enphase shares rose 4% in the past week to 318.01, continuing to find support at a rising 21-day line. A pullback to the 21-day, perhaps break of the 50-day line to catch up, may offer a safer buying opportunity. A number of solar plays still look strong.
CELH shares fell 4.9% to 100.70 last week, but found support at the 10-week moving average. A move above Thursday’s high of 108.37 could offer an aggressive entry. In a few weeks, Celsius stock may have a new base with a buy point of 118.29.
EV-focused chip maker Wolfspeed gained 5.25% to 120.21 last week, including Friday’s 2.8% gain. Investors can treat 123.35 as a buy point for WOLF shares from a handle in a longer consolidation.
Vertex shares fell 0.9% last week to 289.42, but rose 0.8% on Friday to push above the 21-day, 50-day and 10-week lines. A move above the September 12 high of 296.14 would offer an early entry. It is possible VRTX stock will have a flat base in a few days, with a buy point at 306.05.
Tesla shares rose 1.2% to 303.35 in the past week, after rising 10.9% the previous week. Shares in the EV giant held support at the 200-day moving average.
The relative strength line for TSLA stock has improved considerably. over the past two weeks, hitting a five-month high. The RS line, the blue line in the accompanying chart, tracks a stock’s performance against the S&P 500 index.
Investors can use a move above Thursday’s high of 309.12 as an aggressive entry, or a short-term high of 314.64. It would still be a long way from a traditional point of purchase.
For all of these stocks, the weak market conditions increase the risk of any buys now.
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Stock market analysis
The stock market started the last week with a strong rise on Monday, which now seems like a long time ago. The major indexes plunged through their 50-day moving averages on Tuesday. On Friday, the Nasdaq and S&P 500 closed below their September and late July lows, though they were coming off intraday lows.
The major indices have now repeated more than half of the rise from mid-June to mid-August.
Yes, some leading stocks held up, but for every Tesla, Vertex or Celsius, there were several quality names that suffered damaging losses
Tuesday’s CPI report not only caused serious technical damage to the market, it undermined the broader bull case. Investors had been betting that a tame inflation report would spur the Fed to start slowing rate hikes, at least after September. Those hopes have been pushed back.
It is the second time that markets have been too rosy about Fed policy. The summer rally was spurred in no small part by investors expecting the Fed to end rate hikes soon — and then start cutting sometime in 2023. Powell’s Jackson Hole speech ended talk of a “Fed pivot” to rate cuts.
It’s possible that the Fed meeting itself on Wednesday won’t be a big market mover, given how much investors have adjusted over the past three weeks.
Prices are going to go high and stay there for a longer period of time. The Fed is willing to let the U.S. fall into recession to wring out inflation.
Aside from falling jobless claims, which only added to the concerns of the Fed, recent economic data has been disappointing. An environment with high inflation, high wages and low growth is a major challenge for any company.
The catastrophic FedEx (FDX) earnings and comments, mixed results from Adobe (ADBE) and warnings from Nucor (NOW) and US Steel (X) reflects that companies are facing an extended period of uneven or weak performance. The multinational companies and exporters that dominate the S&P 500 could be particularly vulnerable, given the strong dollar coupled with weakness in Europe and China.
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What to do now
The stock market is not in good shape. Macroeconomic conditions are bad. Investors must consider that the market could undermine June’s lows or be bounded for weeks or even months until there is real clarity on the endgame for Fed rate hikes.
Investors’ exposure should be minimal. There is nothing wrong with being 100% cash, especially if recent trades have gone against you.
Focus on building your watchlists and pay attention to stocks that are showing resilience. If the market remains weak, some of these names will falter, while others will emerge. The key is to have an updated list when market conditions improve and you are ready to take advantage.
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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