Dow Jones Futures: Stock market sells off as Hawkish Fed sees new terminal rate
Dow Jones futures fell modestly overnight, along with S&P 500 futures and Nasdaq futures. The stock market lashed sharply on Wednesday after the Federal Reserve once again hiked aggressively and signaled a higher peak, or “terminal” rate.
This is a stock market correction. Investors should be cautious but look for leading names.
Celsius Holdings (CELH), Shockwave Medical (SWAV), WE HAD (WE HAD), GlobalFoundries (GFS) and Enphase Energy (ENPH) all show strong relative strength in a weak market.
CELH stock and Shockwave Medical are on the IBD Leaderboard watch list. Celsius Holdings, Enphase and SWAV stock are at the IBD 50. ENPH stock is at the IBD Big Cap 20. Celsius was Wednesday’s IBD Stock of the Day, while Shockwave was Monday’s.
The video embedded in this article discussed Wednesday’s rollercoaster market action and analyzed Celsius, ATI and GFS stocks.
As expected, the Fed raised its key interest rate by 75 basis points for a third meeting in a row, lifting the target range to 3%-3.25%.
Fed policymakers now see the fed funds rate at 4.4% by the end of 2022, up from 3.4% after the June meeting. That’s what the markets are pricing in: Another 75 basis points at the November meeting, followed by 50 basis points in December, for a year-end range of 4.25%-4.5%.
The central bank also signaled a modest tightening in 2023, forecasting an interest rate of 4.6% at the end of next year, against a forecast of 3.8% in June. It is also not in line with what market observers have expected for the terminal price. Politicians expect the rate to return to 3.9% in 2024.
Fed chief Jerome Powell emphasized once again that the central bank will not give up against inflation. He noted that a “soft landing” would be difficult, but would not say what the odds of a recession are. “At some point,” the Fed will slow the pace of rate hikes, Powell said, but did not indicate when that might happen. He added that the Fed’s policy will have to be “restrictive” for some time.
Fed chief Powell said the labor market continues to be “out of balance,” although he added that commodity prices appear to have peaked.
Dow Jones Futures today
Dow Jones futures fell 0.4% relative to fair value. S&P 500 futures fell 0.6 percent. Nasdaq 100 futures fell 0.8 percent.
The 10-year government yield rose 4 basis points to 3.55%.
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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Stock market Wednesday
Stocks rose modestly into the Fed meeting decision, then went on a rollercoaster ride that ended at session lows.
The Dow Jones Industrial Average fell 1.7% in Wednesday’s trading. The S&P 500 also retreated 1.7%. The Nasdaq composite fell 1.8%. Small-cap Russell 2000 fell 1.5%
US crude oil prices fell 1.2% to $82.94 a barrel.
The 10-year government yield fell 6 basis points to 3.51 percent after a brief period of 3.62 percent following the Fed rate hike. The two-year government yield rose above 4%, closing around 4.04%, but well off session highs.
Among the top ETFs, the Innovator IBD 50 ETF (FFTY) fell 1.8%. The iShares Expanded Tech-Software Sector ETF ( IGV ) gave up 1.4%. VanEck Vectors Semiconductor ETF ( SMH ) lost 0.8%.
The SPDR S&P Metals & Mining ETF ( XME ) fell 2.1% while the US Global Jets ETF ( JETS ) fell 4% on a bad day for travel bets. The SPDR S&P Homebuilders ETF ( XHB ) fell 1.1%. The Energy Select SPDR ETF (XLE) retreated 1.5% and the Financial Select SPDR ETF (XLF) 2.1%. The Health Care Select Sector SPDR Fund ( XLV ) was down 1.7%.
ARK Innovation ETF ( ARKK ) reflected more speculative stock stocks, shedding 2.65% and ARK Genomics ETF ( ARKG ) 2.7%.
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Celsius shares fell 3.9% to 98.23 on Wednesday. Shares have pulled back to find support at their 10-week moving average after a 209% run from early May to late August. In a couple more weeks, CELH stock could have a new base, with a buy point at 118.29. Investors can use 108.47 as an early entry for the energy drink maker.
The relative strength line for the CELH share is at record high levels.
SWAV stock fell 1.85% to 284.69 on Wednesday, reversing lower from 300.96 intraday. Shockwave stock continues to find support around its 21-day line.
ATI stock lost just over 2% to 29.67, trading around its 21-day line after retreating from a seven-year high of 33.31. Shares of the specialty alloy maker have pulled back to the top of a previous base and just above the 10-week line. A 10-week line bounce can provide an early entry, with a proper base still a week away.
While ATI stock has pulled back, the RS line is right on highs.
GlobalFoundries shares fell 0.9% to 56.29. It’s just above the 50-day and brand new 200-day line, while GFS stock is just below the 10-week line. The IPO for the 2021 chip foundry has a very deep double-bottom base with handles, giving a buy point of 66.06. At the end of this week, GFS stock’s handle will be long enough to be its own base, with the same 66.06 entry.
Enphase shares were down 15 cents at 304.56, continuing to find support from its 21-day moving average. ENPH storage is still extended from the 50-day line, but is getting smaller. The RS line for Enphase stock has hit new multi-week highs.
Stock market analysis
As usual, the stock market rallied after the Fed’s rate hike decision, new rate estimates and Powell’s comments, quickly rising sharply before finally closing with heavy losses. The major indexes finally had ugly, external downside reversal sessions.
While markets were not blindsided on Wednesday, the overall Fed tone was likely a bit more hawkish than expected. But ultimately, the Federal Reserve is raising interest rates aggressively despite rising recession risks, to put inflation back in the box.
Markets often want a day two Fed reaction. But even if the stock rebounds on Thursday, it wouldn’t be meaningful.
The major indexes are all undercutting recent intraday declines on Wednesday and losing sight of their 50-day moving averages. Lowest June is not too far away.
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What to do now
Ultimately, it’s not the news, but the market reaction to the news that matters. And the stock market reacted badly to Wednesday’s Fed meeting decision.
Could the market have a short-term bounce, or even a decent rally over several weeks? Secure. But investors will want to see a lot more evidence.
Leading stocks such as Celsius, Shockwave and Enphase may flash buy signals early in a market rally attempt. But investors must balance the urge to get into hot stocks quickly against ensuring that a broad uptrend is underway. If the market heads towards June lows or beyond, even relative leaders are likely to collapse.
If a real stock market rally takes hold, there will be many opportunities. The key is to be ready.
Work with these watchlists. Focus on stocks with strong relative strength and those names that hold or regain important moving averages.
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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