Dow Jones Futures Loom: Market Rally Faces Fed, Megacaps, Cloud Stocks; What to do now

Dow Jones futures open Sunday night, along with S&P 500 futures and Nasdaq futures. Even with a solid finish in Friday’s whipsaw session, the stock market rally suffered significant damage over the past week, with the major indexes falling on hawkish comments from Fed Chairman Jerome Powell.

X

The Nasdaq had its worst week since January as megacaps plunged and cloud software crashed.

apple (AAPL), Amazon.com (AMZN) and Google parent Alphabet ( GOOGL ) all lost more than 10% for the week, with Facebook parent Meta platforms (META), Tesla shares and Microsoft shares not far behind. Google Stock, Meta, Amazon.com (AMZN) and Microsoft (MSFT) reached all bear market levels. Apple makes and Tesla (TSLA) didn’t, but they’re close.

Meanwhile, Twilio (TWLO) and Atlasian (TEAM) crashed on Friday with disappointing results and guidance, losing more than 40% for the week. A number of other software names fell, with or without earnings.

A market rally trying to beat the Fed with big tech sector plunging? That’s a tall order. So while there are some stocks and sectors showing strength, investors should be extremely cautious in the current environment.

In other news, Warren Buffett’s Berkshire Hathaway (BRKB) reported on Saturday a 20% increase in operating profit. The conglomerate suffered a net loss when the ongoing bear market hit its investments.

Dow Jones Futures today

Dow Jones futures open at 6 p.m. ET, along with S&P 500 futures and Nasdaq 100 futures.

Goldman Sachs now expects S&P 500 earnings to be flat in 2023, down from its previous target of 3%.

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 market rally started the week on a decent note, but then sold off on Wednesday afternoon due to Fed Chairman Jerome Powell’s hawkish comments. The major indices gave up more ground on Thursday. Stocks took a beating on Friday after a mixed jobs report, but ultimately closed solidly higher that day.

The Dow Jones Industrial Average still fell 1.4% in last week’s trading. The S&P 500 index fell 3.3 percent. The Nasdaq composite plunged 5.7%, its worst loss since the week ended Jan. 21. The small-cap Russell 2000 fell 2.4%.

The 10-year government yield jumped 15 basis points to 4.16%. The 10-year yield resumed its advance after snapping a 12-week winning streak and briefly traded back around 4%.

The dollar rose 0.2% for the week, but plunged 1.9% on Friday, its biggest one-day drop in years. That probably contributed to Friday’s stock market gains.

Markets now see a 61.5% probability of a 50 basis point hike at the December Fed meeting. The consumer price index for October will be released on Thursday. The jobs and CPI reports for November will be available before the Fed rate hike decision on 14 December.

US crude oil futures rose 5.4% last week to $92.61 a barrel. Natural gas increased by almost 13 percent.

Technical wreck

Apple shares, which had risen to the 200-day line last week, plunged 11.15% to 138.38 in the past week. The AAPL share came within a krone of the low in October, although it still has a little more distance to the bear market’s low in June. Microsoft fell 6.1%, Google 10.1%, Amazon 12% and META stock 8.5%, all to multi-year lows. Tesla shares fell 9.2% for the week, touching an Oct. 24 low on Friday. That’s after starting the week strong, with 237.40 intraday on Tuesday.

Meanwhile, there are dark days ahead for cloud software. Here are just a few examples: Atlassian stock plunged 29% on Friday and 38% for the week. Twilio stock crashed nearly 35% on Friday and 43.5% for the week. Snowflake (SNØ), which won’t report for a few weeks, dipped 17% for the week.

Meanwhile, Fortinet ( FTNT ) crashed 17.5% for the week after weak billings guidance offset strong earnings and a positive revenue outlook. Paycom (PAYC) plunged 10.3% despite robust results and guidance.

Companies looking to cut costs can curb spending on software when setting budgets for 2023.

ETFs

Among the top ETFs, the Innovator IBD 50 ETF ( FFTY ) fell 1.2% last week, while the Innovator IBD Breakout Opportunities ETF ( BOUT ) lost 2%. The iShares Expanded Tech-Software Sector ETF ( IGV ) plunged 10.2%, with MSFT stock a key holding. The VanEck Vectors Semiconductor ETF ( SMH ) fell just 0.7%, after jumping 4.65% on Friday, to close high in the weekly range.

The SPDR S&P Metals & Mining ETF (XME) rose 2% last week. The Global X US Infrastructure Development ETF ( PAVE ) was down 0.1%. The US Global Jets ETF (JETS) rose 0.3 percent. The SPDR S&P Homebuilders ETF (XHB) fell 5%. The Energy Select SPDR ETF (XLE) climbed 2.4%, just below an eight-year high. The Financial Select SPDR ETF (XLF) fell 0.9 percent. The Health Care Select Sector SPDR Fund ( XLV ) yielded 1.5%.

As a result of more speculative story stocks, the ARK Innovation ETF ( ARKK ) fell 9.4% last week and the ARK Genomics ETF ( ARKG ) retreated 4.65%. Tesla stock is a large holding across Ark Invest’s ETFs.

Top five Chinese stocks to watch now

Market rally analysis

The stock rally had a bad week, with a hawkish Fed and often weak earnings weighing on the major indexes. The Dow Jones, which has led the market trend, had the mildest decline, but moved back below its 200-day moving average. The Russell 2000 hit resistance near the 200-day line, but recovered on Friday to close above the 50-day line. The S&P 500 went through the 50 days.

The Nasdaq composite, which never reached its 50-day moving average, fell the most, closing below the lowest of the follow-up day on Wednesday, a bearish signal.

The major indexes extended losses Thursday, then fizzled Friday on a mixed jobs report.

The negative market action and the large reversals in many stocks triggered a shift to the “market under pressure.”

The big market driver was Fed chief Powell, who pulled the curtain on the market rally by signaling a shift to smaller hikes but a higher top fed funds rate.

Meanwhile, tech megacaps including Apple, Tesla and Amazon suffered heavy losses. Cloud software names like Atlassian and Twilio merged, with recent earnings and guidance significant factors.

Chips didn’t have a terrible week, relatively speaking, but only a few names traded near tops.

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

There are several resistant market areas. The health sector looks strong overall. Energy names, including a wide range of oil stocks, LNG plants and coal miners, plus a few solar stocks, are doing well.

Lithium and some steel games work well. Infrastructure companies for the energy, utility and telecom industries are a bright area. Networking companies in general are a rare technology area that is a leader. Some restaurants and discount retailers are showing strength. Various financials, especially brokers and brokerage houses, have made strong gains.

Nevertheless, it is difficult to see a strong market recovery with such huge technology sectors flailing. It would be hard enough for the major indexes to move forward with Apple, Google, Tesla and cloud software names lagging behind. But to try to advance with these areas plummeting or crashing?

If inflation reports show a clear and meaningful decline, spurring a reduction in Fed rate hikes, perhaps megacaps and cloud software can bottom out. However, a return to technical leadership may be some way off. On the flip side, if the Oct. 10 CPI report shows inflation remains warm, tech stocks could drag down leading sectors to end the market rally.

Tuesday is election day. The stock market tends to do better with divided government, and Republicans are set to regain control of the House and perhaps the Senate. But political prognosticators have been predicting at least one House GOP victory all year, so it’s not clear whether Tuesday’s actual results will be a big catalyst.

Time the market with IBD’s ETF market strategy

What to do now

The stock market rise is under pressure. Fed switches from fast and furious to slow and long, but it’s still hawkish. The technology sector is a train wreck. The major indices have undermined some key levels. The indices and leading shares are subject to large intraday and daily fluctuations.

This is not a good environment to buy stocks. Investors should look to cut exposure, either explicitly or simply from cutting losses on various positions.

If the market rally shows renewed strength, with the S&P 500 and possibly the Nasdaq moving above their 50-day moving averages, investors may begin to increase exposure. But it will likely require technology to stabilize and inflation data to show some cooling.

If conditions improve, you’ll be ready. There are a number of stocks being created, with many more not too far away. So build your watchlists, be patient and stay engaged.

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.

YOU MIGHT ALSO LIKE:

Why this IBD tool simplifies the search for top stocks

Get the next big winning stock with MarketSmith

Do you want to make quick profits and avoid big losses? Try SwingTrader

Best growth stocks to buy and watch

5 shares close to buy point without this risk