Dow Jones Futures: Market Correction Extends Losses; Four Stocks In Beat-Up Sector Worth Watching

Dow Jones futures were little changed overnight, along with S&P 500 futures and Nasdaq futures. The stock market extended losses Wednesday even as the 10-year Treasury yield retreated modestly.

X

Alcoa (AA) and United Airlines (UAL) reported earnings after Wednesday’s close. American Airlines (AAL), Union Pacific (UNP) and Baker Hughes (BKR) are on tap early Thursday.

The software sector has been among the hardest hit over the past several weeks. Microsoft stock and Palo Alto Networks (PANW) gained ground on Wednesday, while Fortinet (FTNT) and New Relic (NEWR) reversed lower, but outperformed the general market. All are below their 50-day lines, especially Microsoft (MSFT). But these are a handful of software stocks that you may want to keep your eye on for the next stock market rally.

Meanwhile, tech titan Apple (AAPL) continues to look better than just about any big tech stock. But Apple stock fell 2.1% on Wednesday to 166.23, finally closing below its 50-day line.

Microsoft stock is on IBD Leaderboard. FTNT stock and Microsoft are IBD Long-Term Leaders.

Key Earnings

Alcoa earnings easily beat views while sales narrowly topped. AA stock rose modestly in extended trade. Shares dipped 0.7% on Wednesday, but are holding their 21-day line, near highs.

United Airlines reported a smaller-than-expected Q4 loss as revenue topped, but guidance on costs and capacity disappointed investors. UAL stock fell modestly in overnight action after closing down 2.65%, below its 50-day line.

American Airlines stock slumped 3% Wednesday after dropping below its 50-day line on Tuesday.

Union Pacific stock rose a fraction on Wednesday, but is still below its 50-day line after Tuesday’s 3.3% tumble.

Baker Hughes stock retreated 1.9% to 26.29, just below a 27.76 buy point.

Dow Jones Futures Today

Dow Jones futures were slightly above fair value. S&P 500 futures and Nasdaq 100 futures edged lower.

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 Correction Wednesday

The stock market opened higher Wednesday but reversed lower and closed near session lows.

The Dow Jones Industrial Average lost nearly 1% in Wednesday’s stock market trading. The S&P 500 index retreated 1%. The Nasdaq composite, up more than 1% soon after the open, fell 1.15%. The small-cap Russell 2000 slumped 1.6%.

The 10-year Treasury yield fell about 4 basis points to 1.83%, retreating from two-year highs. U.S. crude oil prices climbed 1.8% to $86.96 a barrel, continuing to set multiyear highs. Soaring energy prices raise the prospect of higher inflation, or at least staying high for longer.

Among the best ETFs, the Innovator IBD 50 ETF (FFTY) tumbled 3.2%, while the Innovator IBD Breakout Opportunities ETF (BOUT) retreated 1.8%. The iShares Expanded Tech-Software Sector ETF (IGV) eked out a 0.1% gain after a solid morning advance. MSFT stock is a major IGV holding, with Fortinet, Palo Alto and New Relic also in the ETF. The VanEck Vectors Semiconductor ETF (SMH) skidded 2.8%.

SPDR S&P Metals & Mining ETF (XME) dipped 0.1%, with AA stock a notable holding. The Global X U.S. Infrastructure Development ETF (PAVE) sank 1.2%. U.S. Global Jets ETF (JETS) descended 1.6%. SPDR S&P Homebuilders ETF (XHB) gave up 1.85%. The Energy Select SPDR ETF (XLE) retreated 0.7% and the Financial Select SPDR ETF (XLF) fell 1.7%. The Health Care Select Sector SPDR Fund (XLV) edged down 0.4%

Reflecting more-speculative story stocks, ARK Innovation ETF (ARKK) fell 1.5% and ARK Genomics ETF (ARKG) 1.8%, hitting 18-month and 19-month lows, respectively.

Five Best Chinese Stocks To Watch Now

Microsoft Stock

Microsoft stock edged up 0.2% to 303.33, after running up to 313.90 intraday. That follows Tuesday’s 2.4% decline to a three-month low amid the market sell-off and Microsoft’s $69 billion takeover deal for Activision Blizzard (ATVI). MSFT stock is in a flat base with a 349.77 buy point, according to MarketSmith analysis, but shares are still 8% below their now-declining 50-day line. This stock definitely has repair work to do.

The relative strength line for Microsoft stock has retreated from November highs, but that’s after a solid advance for most of last year.

Microsoft earnings are due next Tuesday. Revenue growth has accelerated for the past four quarters. Earnings growth picked up for three quarters in a row before cooling to a still-solid 25% in the September-ending quarter.

Fortinet Stock

Fortinet stock was one of the last software holdouts, breaking out to a new high in late 2021. But the cybersecurity leader sold off hard to start the new year. FTNT stock has bounced a little from its Jan. 6 lows, but is still below its 50-day line. Shares dipped 0.4% to 307.16 on Wednesday.

Fortinet stock fell back from intraday highs of 323.16, hitting resistance near its 21-day line.

The RS line for FTNT stock is not far from highs.

Fortinet earnings are due Feb. 3.

Palo Alto Stock

Palo Alto stock rose 3.4% to 519.61, closing in on its 50-day line. Like Fortinet, PANW stock hit a new high late last year, then tumbled to start 2022. The RS line for Palo Alto is close to highs.

New Relic Stock

NEWR stock got above its 50-day line intraday, which might have signaled an early entry in a better market. But New Relic stock closed down 0.4% at 105.61. The official buy point is 129.80.

New Relic was once a leader in data analytics software, but shares plunged in 2019 and the company lost money in fiscal 2021 and is expect to do so again in FY 2022 ending in March. But profits are seen returning in the next fiscal year.

NEWR stock gapped up 38.5% on its last earnings report in early November. New Relic earnings for fiscal Q4 2022 are due on Feb. 8.

Stock Market Correction Analysis

The stock market entered a correction after Tuesday’s fierce sell-off to break below key levels. It wasn’t surprising to see the market try to bounce. But even with solid earnings and bond yields edging lower, the major indexes barely got out of the starting gate before backing off and reversing lower.

But that’s classic market correction behavior: Open strong, close weak.

The Nasdaq composite, already below its 200-day line, seems headed for its early October low. That would roughly coincide with the February 2021 peak. The big-cap Nasdaq 100, led by Apple stock and Microsoft, is nearing its 200-day line. The Dow Jones and S&P 500 index aren’t far behind.

The Russell 2000, which undercut its December lows on Tuesday, fell to its lowest level in more than a year, undercutting a long consolidation.

Software rose slightly Wednesday, led by PANW stock and a few others, but closed well off highs. The sector has been ground zero for growth woes in recent months.

Meanwhile, recent market leadership is now struggling. Financials had another losing session. Mixed bank earnings and lower Treasury yields didn’t help. Energy stocks fell even as crude oil prices continued to race higher.

Just 39.8% of investment newsletters were bullish in the latest weekly reading, matching the lowest since shortly after the coronavirus crash. Some 60.2% saw a correction or bear market.

The CBOE Volatility Index, or VIX, has risen considerably in 2022, but the so-called market fear gauge is well off its December highs, let alone much bigger fear spikes.

In any case, the bulls-bears reading and the VIX are secondary indicators. The major indexes and leading stocks are the primary indicators, and they look terrible.

Time The Market With IBD’s ETF Market Strategy

What To Do Now

Even if the major indexes rally strongly for a full session or two, that’s not enough to get excited. The stock market has had a number of one-, two- or three-day advances over the past couple of months, but the overall trend has been lower.

Investors should look for a follow-through day. First, a market rally attempt needs to take hold for a few days. We aren’t even on day one.

IBD founder Bill O’Neil is a lifelong optimist, but don’t confuse consistent optimism for eternal bullishness. You can believe that the stock market will have great opportunities in 2022, and you’re almost certainly right. But that doesn’t mean you should be bullish right now.

Instead of being bullheaded in a market correction, continue looking for tomorrow’s big winners. Look for stocks with strong relative strength, holding key support levels. But relative strength is constantly in motion, especially in stock market corrections.

Apple stock, Qualcomm (QCOM) and Builders FirstSource (BLDR), which had held their 50-day lines as of Tuesday, broke through that key level on Wednesday.

So keep adjusting your watchlists. Perhaps a few software names such as Microsoft and Fortinet will start to reassert relative strength, or perhaps they’ll lag or even break down. Let the market be your guide.

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.

YOU MAY ALSO LIKE:

Best Growth Stocks To Buy And Watch

IBD Digital: Unlock IBD’s Premium Stock Lists, Tools And Analysis Today

The 200-Day Average: The Last Line Of Support?

When It’s Time To Sell Your Favorite Stock

Tesla Vs. BYD: Which Booming EV Giant Is The Better Buy?