Hawkish Fed, weak economic data leads to market reversal

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Dow Jones futures were little changed after hours, along with S&P 500 futures and Nasdaq futures.




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The stock market rally turned lower on Wednesday, with the S&P 500 and the Dow Jones undercutting or testing key levels amid surprisingly weak economic data and aggressive Fed officials.

Apple (AAPL), Microsoft (MSFT), Google parent Alphabet (GOOGL) and Tesla (TSLA) all hit resistance at key levels on Wednesday. None of these mega caps are anywhere near a buying point.

Some leading stocks struggled, such as Celsius (CELH), while others retreated modestly with a few going higher.

Alcoa reported profit after the close. The aluminum giant reported an in-line quarterly loss as sales lagged. AA shares fell sharply in extended trading. Shares have surged since late September and recently retook their 200-day line.

Netflix (NFLX) headlines earnings reports on Thursday. NFLX shares fell lower on Wednesday, not far from multi-month highs. Netflix revenue, subscriber results and guidance will also be important for streaming plays like disney (DIS).

Dow Jones Futures Today

Dow Jones futures were flat versus fair value. S&P 500 futures and Nasdaq 100 futures fell 0.1%.

Remember that overnight action in Dow futures and elsewhere does not necessarily translate into actual trading in the next regular trading session.


Join IBD experts as they analyze actionable stocks in the stock market rally on IBD Live


Stock market rally

The stock market rally began Wednesday with modest to solid gains, but quickly turned sharply lower as investors digested economic data and Fed commentary.

Before the market opened, the producer price index, retail sales and industrial production all showed significant declines in December, much more than expected. Lower inflation and a rapid slowdown in the economy bolstered expectations for slower Fed rate hikes and a near-term shutdown, but also fueled fears of a recession.

James Bullard, president of the St. Louis Fed, and Loretta Meister, president of the Cleveland Fed, both said they expect the central bank to raise interest rates by more than 5%. That’s in line with the Fed’s forecast for a “final interest rate” of 5.1%, but slightly higher than markets currently expect.

Later, the Fed’s Beige Book report predicted “little growth” in the coming months. Several districts of the Fed reported slowing inflation, but only a few saw the labor market weaken.

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Dow Jones Industrial Average tumbles

The Dow Jones Industrial Average fell 1.8% during Wednesday trading. The S&P 500 index fell 1.6%. The Nasdaq composite fell 1.4%. The small-cap Russell 2000 lost 1.6%.

Apple shares fell 0.5% to 135.21, but fell from an intraday high of 138.61, just below the 50-day mark. MSFT shares crossed its 50-day line intraday, but closed 1.9% to 235.81. Early Wednesday, Microsoft said it would cut 10,000 jobs, or 5% of its workforce. AAPL and Microsoft are Dow Jones, S&P 500 and Nasdaq components.

Google stock fell 0.2% after resistance at the 50-day line for a third straight session, but found support at the 21-day line.

Tesla lost 2.1% to 128.78 after reaching 136.66 on Wednesday morning. Shares are back below the 21-day line after a 7.4% jump. TSLA stock hit a bear market low of 101.81 on Jan. 6, but bounced back that day and beyond. Tesla has bounced back in hopes that sweeping price cuts will boost demand, but earnings growth looks set to slow in 2023.

The 10-year Treasury yield fell 16 basis points to 3.37%, a four-month low. The two-year Treasury yield, which is more closely related to Fed policy, fell to 4.11%, reaching its lowest level since early October.

Markets have essentially been locked into a quarter-point rate hike by the Fed on February 1. Investors are strongly in favor of another quarter-point rate hike at the end of March, bringing the Fed Funds rate to 4.75%-5%. But there is now a 25% chance that there will be no movement.

US crude oil prices fell 0.9% to $79.48 a barrel, down from $82.38 intraday. Natural gas plummeted by 7.7%. Copper prices cut intraday gains to just 0.3%, but are up 13% in a nine-day winning streak.

ETFs

Among growth ETFs, the Innovator IBD 50 ETF (FFTY) fell just over 1%. The iShares Expanded Tech-Software Sector ETF (IGV) lost 1.25%, with MSFT stocks a major stake. The VanEck Vectors Semiconductor ETF (SMH) fell 0.6%.

Due to stocks with more speculative stories, the ARK Innovation ETF (ARKK) fell 2.9% and ARK Genomics (ARKG) fell 1.6%. TSLA stock remains an important position in Ark Invest’s ETFs. Cathie Wood’s Ark has been loaded onto Tesla in recent weeks.

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The SPDR S&P Metals & Mining ETF (XME) fell 1.7%, with AA stocks a standout component. US Global Jets (JETS) fell 1.4%. SPDR S&P Homebuilders (XHB) fell 1%. The Energy Select SPDR ETF (XLE) lost 1.8% and the Financial Select SPDR ETF (XLF) lost 1.9%. The Health Care Select Sector SPDR Fund (XLV) fell 1.4%


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Analysis of the market rally

The stock market rally underwent a downward reversal on Wednesday after Tuesday’s mixed session.

The S&P 500 fell below its 200-day moving average to just above its 50-day moving average. The Dow Jones fell below the 21-day and 50-day lines after retaking those levels on Jan. 6.

The Russell 2000 moved even closer to late 2022 highs on Wednesday, but reversed lower for the second day in a row, this time with a more significant swing.

The Nasdaq composite, which had been rallying for seven sessions, fell modestly. But it’s still above the 50-day mark.

While markets are cheering for cooler inflation rates and slowing job and wage growth, they are not keen on a real recession. So while investors initially celebrated the sharp drop in producer prices, they were unnerved by aggressive comments from the Fed given surprisingly weak retail sales and industrial production data.

The stock market rally was due for a setback anyway. It would have been nice if the S&P 500 held its 200 days and the Dow Jones found support at the 50 days, but they haven’t broken decisively lower.

The question now is whether Wednesday’s retreat is just a healthy break or something more serious. A clear break below 50 days would be more worrying for the S&P 500.

It’s no surprise that when the S&P 500 met with resistance, mega-cap names like Apple, Microsoft, Google and Tesla fell back from roughly key levels.

Leading stocks generally pulled back. Some tested or undermined recent buy points, such as CELH stock. But Celsius, which plummeted 9.6% to close below the 50-day mark, was hit unusually hard.

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Many other long-seeking leaders need a market break to form handles or retreat to moving averages.

Meanwhile, Chinese stocks are pulling back this week after a major reopening rally.


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What to do now

Just as the stock market rally was gaining momentum, Wednesday’s pullback came. But after a strong run that started on January 6, major indices and leading stocks generally gave up only a fraction of recent gains. That’s in contrast to recent months where the indices had one or two strong days that would soon be reversed.

Nevertheless, you should therefore be patient and gradually increase exposure, and only if the market attracts you. Don’t buy stocks that are comprehensive and don’t focus too much on a specific stock, sector or theme.

If you’ve added a modest amount of exposure over time over the past several sessions, you’re probably fine. But if you had gone from, say, 30% to fully invested on Tuesday afternoon-Wednesday morning, you could have had some notable losses by Wednesday’s close.

Ideally, the market pullback will be modest and create new, safer buying opportunities. But watch out for new purchases until this market action kicks in. Use this time to update your watchlists, looking for new settings.

Keep in mind that earnings season could disrupt the market rally and individual stocks in particular. Netflix earnings are Thursday night, with oilfield services giant SLB (SLB) expected Friday morning. Microsoft and Tesla have earnings next week, Apple and Google the next week, along with hundreds of other companies.

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 market updates and more.

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