Dow Jones Futures: Hawkish Fed Stuns Wall Street; Tesla, Microsoft, Google Break Key Levels

Dow Jones futures rose slightly overnight, along with S&P 500 futures and Nasdaq futures. The stock market rally turned sharply negative Wednesday on hawkish Federal Reserve comments, closing at session lows. Microsoft (MSFT), Google stock, AMD and Nvidia are coming under increasing pressure, while even Apple and Tesla stock are starting to show strain. Commodity, cyclical and financial stocks are still faring well, but the weight is to the downside.

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Once again, Treasury yields drove the market action. The 10-year Treasury topped 1.7% for the first time in nine months following the release of the December Fed meeting minutes.

Fed Minutes Hawkish

Policymakers signaled that Fed rate hikes could come sooner than expected, as the central bank showed real concern about inflation at the December meeting.

At the December meeting, policymakers agreed speed up the bond taper, reducing monthly asset purchases by $30 billion a month. That means new bond buys will end by mid-March, setting the stage for actual Fed tightening. Notably, some members wanted to start reducing the Fed’s balance sheet “at some point” after the first rate hike. In fact, “many participants judged that the appropriate pace of balance sheet runoff would likely be faster than it was during the previous normalization episode.”

That’s a big shift in tone from Fed chief Jerome Powell right after the December policy meeting. While he said policymakers were starting to talk about cutting the balance sheet, he also assured Wall Street that he would take a “careful, methodical approach.”

The next Fed meeting is on Jan. 25-26.

The 10-year Treasury yield rose 4 basis points to 1.705%, hitting 1.71% intraday. That cleared the October and November peaks to hit its highest level since early April. The benchmark Treasury yield is up 19 basis points for the week.

Meanwhile, the two-year Treasury yield, more closely tied to Fed action, rose 7 basis points on Wednesday to 0.83%, the highest since March 2020. That means the Treasury yield spread actually narrowed slightly on Wednesday. That’s not good news for banks’ traditional borrow short, lend long model.

Apple, Tesla Pulling Back

Among megacaps, Apple (AAPL) and Tesla (TSLA) are no longer shrugging off the growth sell-off. AAPL stock sank 2.66% on Wednesday but could still form a three-weeks-tight pattern after this week. Tesla stock is still up modestly for the week after spiking higher Monday on blowout deliveries, but has dropped below a buy point.

Microsoft stock, Google parent Alphabet (GOOGL), Advanced Micro Devices (AMD), Nvidia (NVDA) and Facebook parent Meta Platforms (FB) all are looking damaged. Microsoft stock and Google lost further ground from their 50-day lines, along with Nvidia. AMD stock dropped below that key level. FB stock fell below its 50-day and 200-day lines on Wednesday, while also undercutting an aggressive trendline entry.

Software and other highly valued stocks, already battered in recent days and weeks, continued to struggle. Computer-vision-chip maker Ambarella (AMBA) crashed 19% on Wednesday after sinking 5.1% on Tuesday.

Datadog (DDOG) rose in overnight trade on a deal with Amazon‘s (AMZN) Amazon Web Services. But DDOG has plunged 18% so far this week.

Nucor (NUE) and Signature Bank (SBNY) broke out, while Cheniere Energy (LNG) cleared a trendline entry. All are in leading groups and sectors right now. But even these stocks came off highs as the broader market came under pressure. SBNY stock closed below its buy point while LNG stock barely closed positive.

Nucor and LNG stock joined IBD Leaderboard, which also boasts Tesla, Microsoft, Google, Nvidia and AMD. NUE stock is on SwingTrader and was Wednesday’s IBD Stock Of The Day. Microsoft and GOOGL stock are IBD Long-Term Leaders. Tesla stock and AMD are on the IBD 50.

The video embedded in this article discusses an important market day and analyzes SBNY stock, Nucor and Reliance Steel (RS).

Dow Jones Futures Today

Dow Jones futures rose 0.2% vs. fair value. S&P 500 futures and Nasdaq 100 futures advanced 0.2%.

Remember that overnight action in Dow futures and elsewhere doesn’t necessarily translate into actual trading in the next regular stock market session.

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

Stock Market Rally

The stock market rally started with the major indexes diverging again, but they all went south after the 2 p.m. ET Fed minutes release and closed at their worst levels of the day.

The Dow Jones Industrial Average fell 1.1% in Wednesday’s stock market trading, after trading higher for much of the session. The S&P 500 index slumped 1.9%. The Nasdaq composite tumbled 3.3%. The small-cap Russell 2000 plunged 3.4%.

U.S. crude oil prices climbed 1.1% to $77.85 a barrel, paring gains from above $78. Natural gas prices also rose.

Among the best ETFs, the Innovator IBD 50 ETF (FFTY) tumbled 4.7%, while the Innovator IBD Breakout Opportunities ETF (BOUT) lost 2.3%. The iShares Expanded Tech-Software Sector ETF (IGV) plunged 4.9%. MSFT stock is a major IGV holding. The VanEck Vectors Semiconductor ETF (SMH) fell 3.4%, with AMD and Nvidia stock major components.

SPDR S&P Metals & Mining ETF (XME) edged up 0.1%, with Nucor stock a component. Global X U.S. Infrastructure Development ETF (PAVE) reversed lower to close down 1.2%. U.S. Global Jets ETF (JETS) descended 1.7%. SPDR S&P Homebuilders ETF (XHB) skidded 2.7%. The Energy Select SPDR ETF (XLE) closed just below breakeven and the Financial Select SPDR ETF (XLF) dipped 1.2%. The Health Care Select Sector SPDR Fund (XLV) sank 0.7%.

Reflecting more-speculative story stocks, ARK Innovation ETF (ARKK) and ARK Genomics ETF (ARKG) both plunged 7.1% to 52-week lows. Tesla stock remains the No. 1 holding across ARK Invest’s ETFs.

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Market Rally Analysis

So much for the divergent market rally. The Dow Jones and S&P 500 fell solidly on Wednesday. The Nasdaq, after paring losses to just hold its 50-day line on Tuesday, tumbled below that key level on Wednesday.

Microsoft and Google stock undercut their December lows, as the damage in growth is no longer limited to those with eye-watering valuations. AMD stock and Nvidia have both seen yet another 50-day/10-week line rebound fizzle, and are closing in on their December lows as well. Meanwhile, the carnage continues in software stocks and just about every highly valued growth name.

Tesla stock fell 5.35% to 1,088.12. It’s still up 3% for the week. But after touching 1,208 Tuesday morning, it’s back below a 1,119.10 buy point. Apple stock sank 2.7% on Wednesday, but is still above its 21-day line.

While Tesla and Apple stock still look relatively solid, so did Microsoft, Google, AMD and Nvidia at the end of last year.

The Russell 2000 tumbled back below its 200-day line.

The S&P 500 and Dow Jones are still just below highs. Real economy names are doing relatively well. That includes steelmakers like Nucor stock and energy stocks such as LNG. Financials such as Signature Bank are holding onto recent gains or moving higher.

Treasury yields will remain front-and-center for the stock market rally for at least the next few days.

Time The Market With IBD’s ETF Market Strategy

What To Do Now

There are stocks and sectors that are working right now. Investors who got on board this week have generally seen gains. But Tuesday’s divergent market turned into broader, sharper selling on Wednesday. More of the same would likely sink resilient sectors. Alternatively,  rotation back into growth wouldn’t be a surprise, and could be bad news for financials or cyclicals.

On the flip side, be wary of any one-day spikes in growth stocks, especially the hardest hit. The software sector and many highly valued names are in significant corrections. A one-day pop within a downtrend would not be surprising. Investors stuck with sharp losses in tech stocks may want to use any rebounds as a chance to get out rather than any opportunity to load up.

Overall, investors should be taking a more defensive approach in the short run. Don’t let winners turn into losers, or losers turn into sharp losses.

Read The Big Picture every day to stay in sync with the market direction and leading stocks and sectors.

Please follow Ed Carson on Twitter at @IBD_ECarson for stock market updates and more.

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