Market Rally Action is dangerous; See Tesla, these EV chip stocks
The stock market recovery showed mixed action last week.
Dow Jones futures open Sunday night, along with S&P 500 futures and Nasdaq futures. Tesla (TSLA) and several chip stocks are worth watching.
The Nasdaq hit a 2023 high last week, but ended with small gains. The S&P 500 and Dow Jones fell for the week, while the market breadth remained weak.
The stock market recovery showed mixed action last week. There are also not many shares that have given buy signals, and some of these have quickly faltered.
But a choppy market rally is dangerous for investors. It is still a time to be mostly in cash.
Tesla stock is trying to bounce back, but faces key resistance as it builds the right side of a base.
EV related chips At Semiconductor (ON), Axcelis Technologies (ACLS) and Aehr test systems (AEHR) all trade near possible listings. Meanwhile, Advanced Micro Devices (AMD), Lamb Research (LRCX) and Broadcom (AVGO) are chip giants close to potential buy points.
Also pay attention to Sarepta Therapeutics (SRPT) on Monday. SRPT stock was halted during Friday’s session, as an FDA advisory panel debated whether to recommend Sarepta’s gene therapy for patients with Duchenne muscular dystrophy. The panel narrowly voted 8-6 in favor of an expedited approval. FDA does not have to follow the committee’s vote, but takes it into account. SRPT stock fell 8.2% in the week to Thursday as FDA briefing documents suggested the treatment may be rejected.
The video embedded in the article discussed the market rally’s mixed messages and analyzed ON stock, Trade Desk (TTD) and Kinsale capital (KNSL).
Dow Jones Futures today
Dow Jones futures open at 6 PM ET on Sunday, along with S&P 500 futures and Nasdaq 100 futures.
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 continued to trade tight, with mixed action looking weaker by Friday’s close.
The Dow Jones Industrial Average fell 1.1% in last week’s trading. The S&P 500 index fell 0.3 percent. The Nasdaq composite rose 0.4 percent. The small-cap Russell 2000 fell 1%.
The 10-year Treasury yield rose 2 basis points to 3.46%, picking up on Friday.
US crude futures fell 1.8% to $70.04 a barrel last week, down 15.1% over four weeks.
Copper prices fell 4 percent. Gold retreated 0.1% but fell 1.1% over the past three days. Silver plunged 6.8 percent.
Among growth ETFs, the Innovator IBD 50 ETF ( FFTY ) rose 0.3% last week, while the Innovator IBD Breakout Opportunities ETF ( BOUT ) fell 0.7%. The iShares Expanded Tech-Software Sector ETF ( IGV ) rose 1.4%. VanEck Vectors Semiconductor ETF (SMH) fell 1.2%%. AMD stock is a large SMH holding, with components from Lam Research, Broadcom and On Semiconductor.
Reflecting more speculative storied stocks, the ARK Innovation ETF ( ARKK ) rose 0.8% last week and the ARK Genomics ETF ( ARKG ) gained 0.5%. Tesla stock is the No. 1 holding across Ark Invest’s ETFs.
The SPDR S&P Metals & Mining ETF (XME) fell 2.6%% last week. The Global X US Infrastructure Development ETF ( PAVE ) fell 1%. The US Global Jets ETF (JETS) fell 1.3%. The SPDR S&P Homebuilders ETF (XHB) closed just above break-even. The Energy Select SPDR ETF (XLE) slipped 2.1%. The Health Care Select Sector SPDR Fund ( XLV ) gave up just over 1%.
The Financial Select SPDR ETF (XLF) fell 1.3 percent.
The SPDR S&P Regional Banking ETF (KRE) fell 5.2 percent. PacWest Bancorp (PACW) plunged 23% Thursday after revealing significant deposit losses in the week ending May 5.
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Tesla fell 1.2% to 167.98 last week, continuing to trade around its 21-day moving average. On Friday, stocks opened strongly but turned lower from near the 50-day moving average.
If Tesla stock makes any upside, it would have a buy point at 207.89 from a double bottom base. The base has formed below the 200-day line, but the buy point is now above the long-moving 200-day.
TSLA stock bulls may spy aggressive moves, such as the 50-day line or perhaps a downtrend line from the top of the three-month consolidation, but risk may be elevated, especially in the current market.
On Friday, Tesla CEO Elon Musk confirmed that Linda Yaccarino, who just stepped down as NBC Universal’s head of advertising, will become head of Twitter. Musk had tweeted on Thursday afternoon that he had found a new leader for the social networking site. That led to the Tesla share rising towards the end.
Yaccarino could help revive Twitter’s ad revenue. For TSLA stock investors, Musk may have more time to spend on Tesla, although he will remain responsible for Twitter’s product and technology.
Chip stocks to watch
On Semiconductor is a Tesla chip supplier. The ON share has traded relatively tight just above the 50-day moving line within a three-month consolidation. On Friday, On Semiconductor stock tried to erase its recent trade, showing an early entry, but the stock quickly erased its gains. Investors can still use a move above the May 8 high of 81.72 to initiate a position.
It is probably a safer bet than buying ON shares on a breakout, with a buy point of 87.65.
Onsi is a major customer for Aehr Test Systems’ chip-testing equipment. AEHR shares sold off hard from late March to late April, but found support at the 200-day line. Shares have rallied since then, rising 2% to 27.67 in the past week. But Aehr shares are still below the 50-day mark. A decisive retracement of the 50-day line would offer an aggressive entry for AEHR stock in a new emerging consolidation. As with ON stocks, it is probably safer to buy Aehr Test Systems from an early entry compared to a traditional buy point.
ACLS stock was a major chip leader in 2023, but also pulled back from late March. Shares of the electric vehicle-exposed chip equipment maker fell on May 4 after first-quarter earnings, but closed lower. Axcelis stock has moved back to the 50-day line, where it is hitting resistance. Retrieving the 50-day line would also break a downtrend line, giving two reasons for an early entry. ACLS stock has a consolidation buy point of 136.48. Axcelis rose 1.6% to 122.11 for the week.
AMD stock rose 19% in the six sessions through May 11, making an early entry on May 8 when it rallied above the 50-day mark. On Friday, shares fell 1.9% to 95.26%. Ideally, the chip giant would forge a handle at the cup base, which currently has a buy point of 102.53.
LRCX shares were down 0.5% at 527.10 for the week. The chipgear giant has a flat-base 548.95 buy point, trading above the 21-day and 50-day lines in recent weeks. Investors can use 536.60 as an early entry. It is a four-week tight pattern buy point on a weekly chart.
AVGO stock has a buy point at 648.60 from a 7% deep flat base, according to MarketSmith analysis. Shares rose 0.2% to 631.15, closing just above the 50-day mark. A decisive move above the 50-day, perhaps crossing a downtrend line, would offer an early entry.
Market rally analysis
The stock market rally had an underwhelming week. On Wednesday, the Nasdaq Composite hit a 2023 high, and made a little more progress Thursday and even early Friday. But the Nasdaq retreated on Friday, ending modest weekly gains.
The S&P 500 pared slim weekly losses but held its 21-day line. The Dow Jones tested its 50-day moving average, an area of support for the major indexes in recent weeks. Both indices lost ground for the second week in a row.
Even Nasdaq’s relative outperformance was largely due to Google’s parents Alphabet (GOOGL) and other megacap stocks. The Nasdaq 100 rose 0.7 percent for the week.
The First Trust Nasdaq 100 Equal Weighted Index ETF (QQEW) fell 0.3%, its fourth straight weekly decline. But it still lasts its 50 days.
The Invesco S&P 500 Equal Weight ETF ( RSP ) lost 1.1%. RSP is fixed below all moving averages.
Other metrics show weak market breadth, including advance/decline lines and new highs vs. new lows.
Not many shares have offered buying opportunities. Several recent income gaps have worked, but not all. Other stocks, such as On Semiconductor, Trade Desk and New relic (NEWR), has teased buy points but then faltered, especially TTD. These stocks can still perform, but it is difficult to advance.
The stock market continues to deal with economic worries, with recession risks now trumping inflation. The banking crisis is not settled. And the debt ceiling limit can be a bigger market problem. A US sovereign default is likely in early June if Congress and President Biden cannot come to an agreement.
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What to do now
The major averages did not have a good week, and they look better than ETFs of equal weight and internal market share.
Investors should have relatively light exposure. If you have some positions that work, you will likely be more invested than others. But even then, there is no reason to be aggressive.
A sideways market is far more dangerous than a bear market. When the indexes and leading stocks crash, it’s clear that cash is king. But a choppy market provides just enough strength to lure investors in, only to cut them off.
Investors should focus on preparing for the next strong uptrend. The big bull market rally could come next week, next month or next year. Despite the market’s problems and lack of stocks to buy, a good number of stocks are establishing themselves or close to doing so. So have the watch lists ready.
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