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Dow Jones Futures: Inflation report, Federal Reserve are big tests for market rally




Dow Jones futures open Sunday evening, along with S&P 500 futures and Nasdaq futures, with the focus on the CPI inflation report and the Federal Reserve.




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The stock market rally retreated last week with the major indexes continuing their trend of jumping to new highs but then fading back. It is a challenging environment to buy stocks.

In the coming week, investors will get a shot of big economic news. On Tuesday, the Ministry of Labor will publish its CPI inflation report for November. On Wednesday afternoon, the Federal Reserve will raise interest rates once again with Fed chief Jerome Powell signaling further tightening in early 2023.

It can be a catalyst for big market gains or losses, or choppy sideways action can continue. Investors should probably wait for the inflation report and the Fed news before adding exposure.

Breakout failures or fizzles are rife, with DXCM shares falling back on Friday after briefly clearing a buy point on Thursday following FDA approval.

But here are five stocks to watch: The Dow Jones giants larva (CAT) and Goldman Sachs (GS), Sanmina (SANM), McKesson (MCK) and Free market (MELI). To be clear, none of these stocks are actionable, with MELI stocks in particular needing some work.

Microsoft (MSFT) is doing relatively well for megacaps, med apple (AAPL) below its 50-day line and Tesla (TSLA) is trying to avoid making new lows in the bear market. But MSFT stock remains well below the 200-day mark and hasn’t made much progress over the past month.

The video embedded in the article reviewed the market action in depth and analyzed Dexcom (DXCM), MercadoLibre and CAT Warehouse.


Economy, S&P 500 faces hard landing – unless the Fed does this


CPI inflation and Fed meeting

Early on Tuesday, the Ministry of Labor will release the consumer price index for November. Overall and core CPI inflation should cool over the next few months, if only because the comparisons are getting tougher. But service prices have been stubbornly strong.

The Federal Reserve wants to see more significant declines in service inflation, as well as wage growth, before it halts interest rate hikes. At 2:00 PM ET, the Fed is expected to raise its interest rate by 50 basis points, to 4.25%-4.5%, ending a streak of four 75-basis point hikes. Investors will have some clues about the February meeting and how high the Fed Funds rate could go. Markets are currently pricing in another half-point Fed rate hike in February, although there is a good chance of a quarter-point move.

Fed Chairman Powell’s comments at 2:30 PM ET, along with the CPI inflation report, could set the tone for Fed policy heading into 2023.

Powell and several policymakers have signaled that a recession may be necessary to bring inflation under control.

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.


Join IBD experts as they analyze actionable stocks in the stock market rally on IBD Live


Stock market rally

The share price rally saw significant declines for key indices in the past week.

The Dow Jones Industrial Average fell 2.8% in last week’s trading. The S&P 500 index lost 3.4 percent. The Nasdaq composite fell 4%. The small-cap Russell 2000 plunged 5.1 percent.

The 10-year government yield rose 6 basis points to 3.57%, back from 3.4% midweek.

U.S. crude futures plunged 11% to $71.02 a barrel last week, with gasoline futures down 9.8%. Both reached lowest levels in 2022. Natural gas prices fell 0.6 percent.

ETFs

Among key growth ETFs, the iShares Expanded Tech-Software Sector ETF ( IGV ) fell 4.6%, with Microsoft stock a large holding. The VanEck Vectors Semiconductor ETF ( SMH ) retreated 1.7%.

ARK Innovation ETF ( ARKK ) reflected more speculative stock stocks, falling 9.2% last week and ARK Genomics ETF ( ARKG ) 8.1%. TSLA stock is a massive holding across Ark Invest’s ETFs.

The SPDR S&P Metals & Mining ETF (XME) gave up 6.4% last week. The Global X US Infrastructure Development ETF (PAVE) fell back 2.85%. The US Global Jets ETF (JETS) fell 3.3%. The SPDR S&P Homebuilders ETF (XHB) fell 2%. The Energy Select SPDR ETF (XLE) plunged 8.45%, decisively breaking its 50-day line. The Financial Select SPDR ETF ( XLF ) retreated 3.9%. The Health Care Select Sector SPDR Fund ( XLV ) fell 1.3% after climbing for eight of the previous nine weeks.


Top five Chinese stocks to watch now


Megacap stocks

Apple shares fell 3.8% in the past week, falling below that key level on Tuesday and hitting resistance there on Friday. Bad news about iPhone production can be priced in, and AAPL stock is on the way back up.

Fellow Dow tech titan Microsoft shares also fell 3.8%, but held support at the 21-day line, modestly above just the rising 50-day. But it is well below the 200-day mark. MSFT stock is essentially flat compared to a month ago, much like the S&P 500 and Nasdaq.

Tesla shares fell 8.1% in the past week, even with Friday’s 3.2% pop. TSLA stock bounces off recent bear market lows. Tesla announced new China incentives in the past week with widespread media reports that the Shanghai plant will significantly cut production in the coming weeks, even halting Model Y production.


Tesla vs. BYD: Which EV giant is the best buy?


Stocks to watch

Caterpillar shares fell 3.7% to 227.29 last week, below the 21-day line. The retreat can end up as a constructive shakeout. CAT stock has a buy point at 238 or 239.95 from a long cup base. In another week, the Dow heavy equipment giant could have a flat base with that 239.95 buy point. A slightly longer break would allow the rapidly rising 50-day line to narrow the gap with CAT stock.

Goldman shares fell 5.6% in the past week to 359.14, rounding out a breakout from a cup base with a buy point at 358.72, before rising slightly above it. A solid bounce from here could offer another entry, especially if the 50-day or 10-week line catches up. On a weekly chart, GS stock has a 13-month cup with handle, with a buy point at 389.68, according to MarketSmith analysis. The last week has now created more depth on that handle, which can also become a flat base within a week.

Sanmina shares fell 7.3% to 62.48 in the past week. The SANM share had consolidated tightly in the profit zone after a breakout from a cup base in October. Shares could start a pullback to the 50-day/10-week line, offering a buying opportunity, even if the weekly decline was abrupt. SANM warehouse is also working on a possible flat base.

McKesson shares fell 4% to 371.37 last week, falling on Friday to just below the 50-day and 10-week lines. The MCK share is working on a new consolidation after a strong sell-off on 10-11. November that beat many defensive medical stocks. A move above the December 2 high of 389.45 could offer an early entry, still near the moving average.

MELI shares fell 5.1% to 896.48, its fourth straight weekly decline. The Latin American e-commerce and payments giant has a buy point at 1,095.44, with a trend line around 1,025. An aggressive entry could be a decisive retracement of MELI stock’s moving average, with the Dec. 2 high of 957 triggering. While MercadoLibre stock has been trending lower, the weekly losses come on lower volume with some relatively strong positive bars.

Market rally analysis

A week ago, the stock market rally hit new highs, with the S&P 500 above its 200-day line for the first time in months. But as investors reassessed the jobs report and Fed Chairman Powell’s comments, the major indexes retreated.

The S&P 500 fell below its 200-day line, while the Nasdaq tested its 50-day. Both hit resistance at the 21-day line late in the week. The Russell 2000 fell below its 200-day and 21-day lines and came all the way down to its 50-day, just below its 10-week line.

The rally-leading Dow holds support around its 21-day.

The S&P 500 is basically where it was after Nov. 10, when a tame October CPI inflation report boosted stocks. The Nasdaq and Russell 2000 are back to early November levels, but also the peaks at the end of October.

If you had to design a scenario to lure investors in to get roughed up repeatedly, this current uptrend might be the plan: A market rally with some big one-day gains followed by pullbacks over multiple sessions.

It is still a confirmed market rally. However, further losses, such as the Nasdaq or especially the S&P 500 clearly breaking their 50-day lines, would be worrisome.

Tuesday’s November CPI inflation report and Wednesday’s Fed meeting announcement and Powell’s comments could provide a catalyst for a sustained market rally, or a decisive selloff. But they can also spur another big market pop that seems decisive, only to be followed by another pullback.


Time the market with IBD’s ETF market strategy


What to do now

Investors should be cautious about adding exposure until the CPI inflation report and the Fed meeting are in the rearview mirror. Even as markets jump on the inflation data and Fed Chair Powell’s comments, investors should be selective about new purchases in case the major indexes simply fall back over the next several sessions.

At some point, a sustained, steady market rally will take hold. When that happens, there will be plenty of buying opportunities.

So get ready for the shopping list for the stock market holiday. A large number of stocks from a variety of sectors are establishing themselves or are in the process of doing so.

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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