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Business

Dow Jones Futures: Market Rally Feels Fed Chair Powell’s ‘Pain’; What to do now




Dow Jones futures open Sunday night, along with S&P 500 futures and Nasdaq futures. Stocks rallied suffered significant losses for a second week in a row, and Federal Reserve Chairman Jerome Powell said on Friday that more “pain” is needed to bring down inflation.




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The major indexes sold off on Friday, moving back toward the 50-day moving average. Several shares that flashed buy signals on Thursday, such as Axcelis Technologies (ACLS), fell back on Friday. Some, such as Steel dynamics (STLD), did not.

Investors should be cautious about adding exposure while the market is still pulling back. They may need to pull back if they got overexposed or bought extended stocks in the last few days.

However, the current “pain” of the market rally may be creating opportunities for big gains, but when is unclear. A number of stocks are forming handles, while others are working on bases or possibly tracking towards bullish pullbacks.

apple (AAPL) and Arista Networks (ANET) has forged handles in the last withdrawal. Apple shares and Arista are no longer so far from key moving averages. Tesla stock, meanwhile, is trading tight around some key levels.

ACLS stock and Steel Dynamics are on the IBD Leaderboard. STLD stock is also on SwingTrader. ANET makes and Tesla (TSLA) is on the IBD 50 list. Arista and STLD stock are in the Big Cap 20. Arista Networks was Friday’s IBD stock, with Apple stock and Steel Dynamics being the picks for the previous two days.

Meanwhile, China is stockpiling Pinduo duo (PDD), Baidu (BEGIN), BID (WANT), Nine (NIO) and Li Auto (LI) is in focus in the coming week with key news in print. U.S.-listed Chinese stocks bounced Thursday, sometimes sharply, on a report that a U.S.-China review agreement was close. The tentative agreement, confirmed Friday, should end fears of a write-off.

The PDD stock and Baidu in particular showed bullish action, but have earnings early this week. Tesla EV rivals BYD, Nio and Li Auto need some work but are worth a look.

Dow Jones Futures today

Dow Jones futures open at 6 PM ET on Sunday, along with S&P 500 futures and Nasdaq 100 futures.

ETFs that trade the Dow, S&P 500 and Nasdaq 100 fell modestly on Friday night, as selling pressure continued.

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

Stocks fell sharply last week with some positive action bookended by a Monday pullback and Friday’s sharp sell-off after Powell’s speech.

Powell’s short-but-not-so-sweet Jackson Hole speech on Friday underscored the 1970s lesson for politicians not to let the weight fall quickly. The Fed chief said the US needs a “sustained period of below-trend growth”. It will mean some “pain” for households and businesses, he said, but the alternative is “far greater pain”.

Bottom line: The Fed is going to raise interest rates significantly more, and keep them there.

The Dow Jones Industrial Average slipped 4.2% in last week’s trading. The S&P 500 index lost 4 percent. The Nasdaq composite gave up 4.4 percent. The small-cap Russell 2000 lost 3%.

The 10-year Treasury yield rose nearly 5 basis points to 3.035%, the fourth straight weekly increase.

US crude oil futures rose 2.9% to $93.06 a barrel last week.

ETFs

Among the top ETFs, the Innovator IBD 50 ETF ( FFTY ) climbed 1.65% last week, while the Innovator IBD Breakout Opportunities ETF ( BOUT ) lost 2.2%. The iShares Expanded Tech-Software Sector ETF ( IGV ) fell 5.2%. VanEck Vectors Semiconductor ETF (SMH) fell 5%.

The SPDR S&P Metals & Mining ETF ( XME ) climbed 3.4% last week, with STLD stock a notable holding. The Global X US Infrastructure Development ETF ( PAVE ) retreated 2.5%. The US Global Jets ETF (JETS) fell 2.1 percent. The SPDR S&P Homebuilders ETF ( XHB ) fell 5.1%. The Energy Select SPDR ETF (XLE) climbed 4.3% and the Financial Select SPDR ETF (XLF) climbed 3.6%. Health Care Select Sector SPDR Fund (XLV) decreased 4.2%

Following more speculative stock stocks, the ARK Innovation ETF ( ARKK ) fell 4.1% last week and the ARK Genomics ETF ( ARKG ) gained 0.7%. Tesla stock is a large holding across Ark Invest’s ETFs. Cathie Wood’s Ark also owns some BYD and Nio shares.


Top five Chinese stocks to watch now


Apple stock

Apple shares fell 4.6% in the past week to 163.62. Friday’s 3.8% loss pushed the iPhone giant below its 21-day moving average. AAPL stock now has a buy point at 176.25 in its base dating back to the beginning of the year. The relative strength line, the blue line in the charts, has reached new highs. On August 17, when Apple stock hit a recent high, shares closed 16.1% above the 50-day mark and 8.9% above the 200-day mark. They are now only 1.7% and 5.9% above the respective levels.

ANET share

Arista shares fell 5.4% to 123.03 last week to just below its 21-day moving average. Shares now have a buy point at 132.97 in a double bottom base. ANET stock is just 2.7% above its 200-day line versus 10.5% on August 18. The RS line hit a record high on a weekly chart.

Arista’s earnings and sales growth have accelerated over the past three quarters, 59% and 49% respectively in Q2.

Tesla shares

Tesla shares fell 2.9% this past week to 288.09, closing slightly below the 21-day line after attempting to break above the 200-day line several times. A decisive retracement of the 200-day line, perhaps above 314.64, would offer an aggressive entry. But make no mistake, TSLA stock will remain low in the base, far from the official buy point of 402.73.

Tesla on Friday began selling a new lower-base model Model Y to Europe, with a shorter range but much cheaper. Prices vary significantly from country to country, undercutting the Model 3 in some countries.

The next few months will be interesting for Tesla. Production capacity has increased significantly for the no-longer-fresh lineup, while rivals – including BYD and Nio – are introducing new models and increasing EV and total automatic production.


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


China shares

Pinduoduo will report earnings before the open on Monday, while Baidu is on tap early Tuesday. Both PDD stock and Baidu bounced back above their 50-day and 200-day lines on Thursday, making early gains. Both gave up some of those gains on Friday, but rallied sharply for the week.

PDD stock is in a bottom base with an official buy point of 68.81.

Baidu stock is in a 10-month consolidation with a buy point at 182.70. But stocks are around a long, downward trend line. Investors can also look at the action since late June as their base, with a buy point of 156.87.

BYD is likely to report earnings next week, after providing strong preliminary first-half results in mid-July. In the next few days, the Chinese electric car and battery giant should begin Atto 3 deliveries in Australia and begin Seal sedan deliveries in China.

Nio launches the ES7 SUV on Sunday, with the ET7 sedan a month later. Li Auto should start deliveries of its luxury L9 hybrid SUV before the end of the month.

Li Auto, Nine and Xpeng (XPEV) will report August deliveries on Thursday, September 1, with BYD following a day or two later.

BYD shares and LI shares are finding support around their 200-day lines, pulling back significantly after rising to June highs.

Nio shares are just below the 50-day line within a bottom base that is below the 200-day. A strong move above the 50-day line would also mean breaking a downtrend in the base, offering an early entry. But the still falling 200-day line would quickly emerge as resistance.

Market rally analysis

The stock rally showed encouraging actions at times during the week, especially on Thursday. But with Monday’s retreat and Friday’s Powell-led selloff, the major indexes sold off hard for the week.

Powell’s hawkish message was not a surprise, but the market did not react well. The Dow Jones, S&P 500 and Nasdaq composite returned below their 21-day moving averages and are now not too far off their 50-day lines – as well as some big round numbers for each of the major indexes.

The Russell 2000, which started to move back toward its 200-day line, also fell back hard on Friday.

Many of the leading stocks that rose, especially on Thursday, fell back on Friday. ACLS stock, which jumped nearly 13% on Thursday to break out, wiped out all of its gains on Friday. On the plus side, Steel Dynamics rose 0.1% on Friday, in a buy zone after jumping 6.6% on Thursday.

Since the indices bottomed out in June, there have been concerns that we are in a bear market rally. We still don’t know the answer, but it certainly “bears” to see.

Commodity stocks are doing relatively well, including energy, fertilizer and steel producers.

The SMH and IGV ETFs are almost back to their 50-day lines, as chips and software had a poor end to the week. ARKK is below the 50-day limit.

Some formerly highly valued tech leaders may make big new runs, but most of them probably won’t. After bottom fishing rallies of 50%, 100% or more from bear market lows, many have sold hard in recent weeks.


Time the market with IBD’s ETF market strategy


What to do now

With the Nasdaq down nearly 4%, it’s likely to struggle the day before. And that’s what happened to many of Thursday’s buys, although they could bounce back again.

However, investors may need to reduce their exposure, especially if they have rallied in recent days and are now sitting on some losses.

If the market shows any indication that it is ready to go higher, new buying opportunities will arise, with Apple, Arista and Tesla among the possibilities. But investors should still be cautious, thinking about the risk of a quick top-false or resistance at the 200-day line.

Meanwhile, there is a risk that the market will pull back to the 50-day line, or worse. Depending on what followed, such a move could create a series of setups or a challenging period.

So run your screens this week and rework your watch lists. Keep your exposure modest, at least until the major indices move above the 200-day lines. Even when searching for new purchases, be ready to scale out more aggressively.

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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