Fed rate hike looms after market rally falters; Tesla shares hit new lows as Elon Musk admits this

Dow Jones futures edged higher overnight, along with S&P 500 futures and Nasdaq futures. All eyes await the announcement of the Federal Reserve meeting and Fed Chairman Jerome Powell. The outlook for Fed rate hikes will be key.

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Stocks closed modestly higher, but after initially rising on a tame CPI inflation report. Promising moves from leading stocks generally fell or turned lower.

Tesla ( TSLA ) plunged to fresh bear market lows on Tuesday as sentiment turns decidedly bearish on the EV giant. TSLA shares have sold off in large volumes. CEO Elon Musk appeared to admit concerns from Tesla’s claims on Wednesday.

Among Dow Jones megacap technologies, apple ( AAPL ) erased a strong early gain amid reports of a sweeping change in the App Store model. Microsoft (MSFT) closed higher, but after hitting key resistance.

Airline stocks were sold hard as one JetBlue (JBLU) warning added to recent concerns about travel demand heading into 2023. United Airlines (UAL), which flirted with buy points for the past couple of weeks, plunged on Wednesday.

Meanwhile, General Electric (GE), Goldman Sachs (GS) and Peabody Energy (BTU) all found support at key levels and are near possible buy points. Peabody was Tuesday’s IBD Stock Of The Day.

The video embedded in this article discussed Tuesday’s market action and analyzed Tesla stock, GE and Peabody Energy.

Fat rate hike, Outlook

The Federal Reserve will almost certainly raise interest rates 50 basis points at 2:00 PM ET, after four straight Fed rate hikes of 75 basis points. What investors want are signals about Fed interest rate policy in early 2023.

After Tuesday’s CPI inflation report, the markets are now leaning slightly towards a quarter-point rate hike on February 1.

The consumer price index for November was lighter than expected, with a monthly increase of 0.1%, or 0.2% excluding food and energy. CPI inflation fell to 7.1%, the lowest in a year and down from October’s 7.7%. Core CPI inflation cooled to 6% from 6.3%.

The Fed will also release quarterly economic forecasts, along with policymakers’ forecasts for interest rate increases. It can provide insight into where policy makers see the “terminal” or top rate for fed funds.

Fed Chair Jerome Powell will speak at 2:30 PM ET. His comments on inflation and recession risks and peak interest rates at the Fed will be critical for stocks and Treasuries.

Dow Jones Futures today

Dow Jones futures rose 0.1% against real value. S&P 500 futures rose 0.1% and Nasdaq 100 futures rose 0.2%.

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 rally got off to a strong start on Tuesday, with the major indexes all clearing short-term tops on the CPI inflation report. But the gains faded significantly.

The Dow Jones Industrial Average closed up 0.3% in Tuesday’s trading. The S&P 500 index rose 0.7 percent. The Nasdaq composite rose 1%. The small-cap Russell 2000 rose 0.3%.

Apple shares rose as high as 149.97 intraday, but closed up just 0.7% at 145.47. It just retook the 50-day line. Apple will open its iPhone and iPad devices to more app stores in Europe, Bloomberg reported, to satisfy European regulators. Apple has turned the App Store into a huge money spinner over the past few years.

Microsoft shares climbed 1.75% to 256.92, closing above their Dec. 1 high. But the shares were a long way from the morning high of 263.92. MSFT stock topped out right at the 200-day line, a key resistance area.

US crude oil prices rose 3% to $75.39 a barrel.

The 10-year Treasury yield fell 11 basis points to 3.5%, but from intraday lows of 3.43%. The two-year Treasury yield, more closely tied to Fed policy, plunged 18 basis points to 4.22%.

ETFs

Among the top ETFs, the Innovator IBD 50 ETF ( FFTY ) rose 0.8%, while the Innovator IBD Breakout Opportunities ETF ( BOUT ) rose 0.9%. The iShares Expanded Tech-Software Sector ETF ( IGV ) rose 1.6%, with the MSFT stock a key component. The VanEck Vectors Semiconductor ETF ( SMH ) rose 1.7%. ARK Innovation ETF ( ARKK ), reflecting more speculative story stocks, fell 0.1% and ARK Genomics ETF ( ARKG ) rose 1.1%. Tesla stock is a large holding across Ark Invest’s ETFs, but especially ARKK.

The SPDR S&P Metals & Mining ETF (XME) gained 0.8% and the Global X US Infrastructure Development ETF (PAVE) gained 0.9%. The US Global Jets ETF (JETS) was down 2.85%, with UAL shares and JetBlue both components. The SPDR S&P Homebuilders ETF ( XHB ) rose 1.8%, with more homebuilders and home-related retailers showing strength. The Energy Select SPDR ETF (XLE) rose 1.9%. The Financial Select SPDR ETF ( XLF ) and the Health Care Select Sector SPDR Fund ( XLV ) both rose 0.3%.

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Stocks to watch

GE shares fell 0.4% to 82.88 after topping its 21-day moving average intraday. General Electric on Monday rounded off a solid advance from a bottom base with a buy point of 81.40. On a weekly chart, GE stock has found support at its 10-week moving average for the first time since early November. A strong pullback from these levels, perhaps topping Tuesday’s intraday high of 84.90, would offer a buying opportunity.

GE earnings, while flat, have rebounded in 2022, with even stronger growth next year.

GS stock also recently rounded a cup-base breakout and found support at the 10-week line, brushing below the 358.72 buy point. The investment bank is picking up again this week. On a weekly chart, Goldman stock is working on a 13-month cup-with-handle base with a buy point at 389.68, according to MarketSmith analysis.

On Tuesday, shares rose 1.5% to 368.89, fractionally above the 21-day moving average but off intraday highs of 378.56. A move above Tuesday’s high could offer an early entry into GS stock.

Peabody energy stocks

BTU shares rose 2.2% to 28.47 on Tuesday, bouncing off the 50-day and 10-week lines but hitting resistance at the 21-day line. Peabody stock has a buy point at 32.99 on a consolidation that goes back nearly eight months. But BTU stock, much like the general market, tends to make rapid advances followed by more gradual withdrawals that give up much of the earlier gains. A move above Tuesday’s intraday high of 29.08 could offer an early entry from both the 50-day and 21-day lines, as well as break the downtrend of the handle.

Tesla shares

Tesla stock opened higher but quickly gave back gains and then turned sharply lower for a second straight session. Shares broke through their bear market lows on Nov. 21, closing down 4.1% at 160.95. Volume was the heaviest in over a year, with several other high trading retreats in the past couple of weeks.

It is possible that some large TSLA stock investors or mutual funds will sell shares as they break down and as the year winds down.

More broadly, Tesla stock has lost roughly half of its value since the end of September. Sharp sales have been followed by tepid, short bounces.

On Tuesday, data showed that Tesla China car registrations last week came in below forecasts. It raises concerns about China’s demand and comes amid widespread reports that Tesla will slow Shanghai production, possibly suspending production at the turn of the year.

Elon Musk on Tuesday appeared to acknowledge that Tesla’s demand is a problem. “Tesla will be great long term but doesn’t control macroeconomic tides,” Musk tweeted.

While a weak global economy is likely a factor, Tesla also faces increasing competition, particularly in China.

Meanwhile, Elon Musk’s Twitter rant is weighing on Tesla stock. His attention seems to be focused on Twitter vs. The EV giant. Meanwhile, Musk’s increasingly partisan trolling tweets have damaged his brand image, especially with Democrats. The concern for TSLA stock investors is that Elon Musk’s negatives will turn off potential Tesla EV buyers.

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

Market rally analysis

Stocks rallied at Tuesday’s open on the tame CPI inflation report, but quickly gave up much of those gains.

All the major indexes briefly topped their December 1 intraday highs before pulling back. The S&P 500 closed back above its 200-day moving average. The Nasdaq continued to bounce off its 50-day and 21-day lines.

The Russell 2000 opened above the 200-day, but faded well below that level and finished below the 21-day line.

If the major indexes, especially the S&P 500, could move above their December 1 highs, that would be a bullish sign, but not necessarily definitive. The current market rally has seen a series of large one-day gains, soon followed by pullbacks that erase this action. This has made it difficult to buy on strength.

Not surprisingly, many stocks showed big bullish moves at Tuesday’s open, but fell back for small gains or outright losses. Megacaps are neutral at best, such as Microsoft shares, laggards like Apple shares, or outright losers like Tesla.

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What to do now

Tuesday’s market action shows why investors should not buy right on the open market, especially when the major indices diverge with news. It also shows why investors need to keep their emotions in check.

If the market rises sharply on Wednesday’s Fed rate hike and Fed Chair Powell’s comments, there will likely be some buying opportunities. But add exposure gradually, use early entries and pullbacks for slightly safer entries.

Until the market recovery shifts from choppy action to sustained uptrend, increasing exposure is risky.

Many shares from a number of sectors are establishing themselves. So you want to be prepared and work on your watch lists. Stay engaged so that you can act as stocks clear buying points.

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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