Dow Jones futures were little changed overnight, along with S&P 500 futures and Nasdaq futures.
The stock market rallied sharply on Thursday morning, but the major indexes pared their gains during the day, while the Russell 2000 hit a new 2023 low as Moody’s Investor Service warned of greater banking contagion and economic fallout. Stocks rose late in the session as Treasury Secretary Janet Yellen promised “further action” on bank deposits if necessary. On Wednesday, the major indexes turned sharply lower on Yellen’s comments and the interest rate hike from the Federal Reserve.
Bank shares were big losers on Thursday. First Republic (FRC) skidded to a record low and PacWest Bancorp (PACW) to an all-time low. But super regionals such as e.g KeyCorp (KEY) and Comerica (CMA) also sold out, with even some giants like Bank of America (BAC) reach multi-year lows.
On the upside, Merit homes (MTH) and KBH shares flashed buy signals amid strong KB Home (KBH) earnings and generally strong action among builders. Microsoft (MSFT) traded back above a buy point. Yum China (YUMC) broke out. The VanEck Semiconductor ETF (SMH) cleared a buy point, offering a way to play the chip sector with NVDA shares and many hot semis extended.
MTH makes and Nvidia (NVDA) is on the IBD Leaderboard. MSFT stock is on the IBD Long-Term Leaders. Meritage and KBH shares are on the IBD 50, along with several other housebuilders. Meritage Homes is Thursday’s IBD Stock Of The Day.
But investors should be careful. Yes, an attempted rally is underway, but it is still a market correction. The rally attempt remains divided and unstable, with the banking sector as a major negative result.
Moody’s: Wider Bank ‘Turmoil’ A Risk
There is a growing risk that regulators “will not be able to contain the current turmoil without long-lasting and potentially serious consequences within and beyond the banking sector.” That could trigger greater “financial and economic damage than we expected,” Moody’s Investor Service warned Thursday. Yet the credit rating agency still expects policymakers to “broadly succeed”.
Bank stocks and the major indexes hit afternoon lows as Treasury Secretary Yellen said in prepared remarks to a House committee that the government “would be prepared to take further action if warranted.”
Aside from that line, Yellen largely echoed Wednesday’s remarks to a Senate panel, when she said officials do not want to extend a “blanket” guarantee to all deposits at all banks. That comment helped trigger Wednesday’s market reversal. However, Yellen had previously indicated that any struggling bank would spur additional deposit guarantees.
The FDIC aims to announce the fate of SVB Financial’s Silicon Valley Bank over the weekend, Barron’s Advisor reported Thursday.
Dow Jones Futures today
Dow Jones futures rose a fraction relative to fair value. S&P 500 futures and Nasdaq 100 futures were steady.
Crude oil futures fell slightly.
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 attempted stock market rally saw big gains during the day, although the major indexes closed higher after turning mixed by mid-afternoon.
The Dow Jones Industrial Average rose 0.2% in Thursday’s trading. The S&P 500 index rose 0.3%, with Zion’s Bancorp (ZION), Comerica and KEY have the three worst results. The Nasdaq composite rose 1%. The small-cap Russell 2000 fell 0.8%.
US crude oil prices fell 1.3% to $69.95 a barrel. Copper futures jumped 1.9%, up 7.5% during a six-session winning streak.
The 10-year government yield fell 9 basis points to 3.41%. The two-year interest rate fell 17 basis points to 3.81%.
Despite Fed signals on Wednesday that the central bank will hike again, markets see a 66% chance of a pause in May, up from 50.1% on Wednesday and 39.7% on Tuesday. Investors expect interest rate cuts from the Fed to start this summer.
Among growth ETFs, the Innovator IBD 50 ETF ( FFTY ) gained 1.2%, while the Innovator IBD Breakout Opportunities ETF ( BOUT ) rose 0.7%. The iShares Expanded Tech-Software Sector ETF ( IGV ) rose 1.5%, with Microsoft shares a key component. The VanEck Vectors Semiconductor ETF ( SMH ) rose 2.7%. NVDA stock is a large SMH holding.
ARK Innovation ETF ( ARKK ) reflected more speculative stock stocks, falling 1.5% and ARK Genomics ETF ( ARKG ) rose 0.7%. Coin base (COIN) and Square parent Block (SQ), both top-10 Ark Invest holdings, fell more than 10% Thursday.
The SPDR S&P Metals & Mining ETF ( XME ) rose 0.3% and the Global X US Infrastructure Development ETF ( PAVE ) fell 0.3%. The US Global Jets ETF (JETS) fell 1%. The SPDR S&P Homebuilders ETF (XHB) closed just below break-even. The Energy Select SPDR ETF (XLE) fell 1.4%. The Health Care Select Sector SPDR Fund ( XLV ) was down 0.2%.
The Financial Select SPDR ETF ( XLF ) gave up 0.7%, hitting a five-month low. BAC stock is a notable XLF holding. The SPDR S&P Regional Banking ETF gave up 2.8%, hitting its worst levels since late 2020. First Republic, PACW, KEY and CMA stocks are all KRE holdings.
Top five Chinese stocks to watch now
Market rally analysis
For a second session in a row, the market rally attempt was whipped by large intraday gains. On Wednesday, the major indices turned sharply down. On Thursday, they closed higher, but that wasn’t the action you want to see in a market rally.
The Nasdaq remained solidly up thanks to megacap techs like Microsoft stock, Nvidia and Meta platforms (META). But it was an inside day, giving up more than half of its 2.5% intraday bounce.
The S&P 500 bounced off its 200-day line, but hit resistance near its 50-day. The Invesco S&P 500 Equal Weight ETF ( RSP ), which is not dominated by these megacap techs, fell 0.35%, marking a five-month low on the day.
The Dow Jones tried to regain the 200-day line, but pared gains. The Russell 2000 opened strongly but turned lower as bank stocks deteriorated again.
The chip sector still looks robust. nvidia stock, Aehr test systems (AEHR) and a few others provide higher power but are generally extended. Several others, such as Materials used (AMAT), is near buy territory, but not really outperforming the SMH ETF.
Homebuilders look strong. KBH shares and Meritage rose against official buy points, but pared intraday gains.
YUMC stock broke out of a flat base. Yum China revenues should boom in 2023 with Covid restrictions lifted.
But the width is narrow.
A sustained market rise is almost impossible if the banking crisis worsens. SVB Financial was an underdog in many ways, so it was a bad sign to see other California-based banks like FRC shares and PacWest come under pressure. Far worse if super regional companies like CMA shares and KeyCorp start to buckle. BAC stock is at its worst level since 2020. Even JPMorgan Chase (IBD), among the best capitalized banks, is testing recent 2023 lows and its 200-day line.
Ex-FDIC chief Sheila Bair told MarketWatch on Thursday that the issuance of unrealized bond losses “is a risk that faces all banks,” not just regional players.
Time the market with IBD’s ETF market strategy
What to do now
The market rally attempt is divided, volatile and news-driven. It is not a confirmed upward trend.
Investors can try to play some managers. But while some, such as Nvidia and On holding (ONON) has worked, many others have failed. Anyone who bought stocks on strength over the past two days is likely sitting on at least modest losses.
So keep the exposure light and cut losses quickly. With winners, you should consider taking at least partial profits quickly to ensure you end up with winnings.
There is nothing wrong with staying fully or completely in cash until there is a sustained market rally with banking headlines in the background.
Regardless, investors should remain engaged and ready to act. That means being prepared with up-to-date watch lists as well as having the exit strategies in place.
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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