Dow Jones Futures: Nasdaq Looks Extended As Fed Decision Looms; What Investors Need Now

Dow Jones futures were little changed overnight, along with S&P 500 futures and Nasdaq futures. The Federal Reserve will announce its policy decision Wednesday afternoon, with markets expecting a “hawkish pause.”

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The stock market rally continued as CPI inflation data reinforced bets that the Fed will take no action on Wednesday. Meanwhile, hopes for China stimulus also buoyed commodities, industrials and many Chinese stocks.

Tesla (TSLA) continued its record-breaking run. Nvidia (NVDA) cleared a buy point for existing investors, though it was an aggressive entry.

The major indexes rose modestly with the Nasdaq and S&P 500 at 52-week highs and the Dow Jones moving to a four-month high. Small and midcap stocks led amid strong market breadth. But the Nasdaq is getting close to being extended — and so are many leaders.

Lattice Semiconductor (LSCC) made a bullish move while Cloudflare (NET) rebounded back above a buy point. Unity Software (U) topped an early entry in its handle. Vertex Pharmaceuticals (VRTX) is flashing an early entry. Freeport-McMoRan (FCX) gapped above its 50-day line.

Still, investors should be cautious about adding exposure, especially in tech stocks, in the current environment.

Tesla and Nvidia stock are on IBD Leaderboard. NET stock is on the IBD 50. TSLA stock is on the IBD Big Cap 20.

The video embedded in this article highlighted the market action and analyzed LSCC stock, Vertex and Freeport-McMoRan.

Fed Meeting Decision

The Consumer Price Index inflation rate fell to a two-year low of 4% in May, slightly cooler than expected. Core CPI dipped to a still-high 5.3%, in line with estimates.

With no negative surprises, the CPI inflation report essentially locked in expectations that the Fed will leave its target rate at 5%-5.25%. The key will be the Fed rate-hike outlook, including from Fed chief Jerome Powell. Markets are pricing in a 65% chance of a Fed rate hike in late July.

The Fed meeting announcement is at 2 p.m. ET Wednesday, with Fed chief Powell due at 2:30 p.m.

Dow Jones Futures Today

Dow Jones futures fell 0.25% vs. fair value. S&P 500 futures edged higher and Nasdaq 100 futures rose 0.1%.

The 10-year Treasury yield fell slightly to 3.81%.

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 showed a broad advance on Tuesday, shrugging off the upside reversal in Treasury yields.

The 10-year Treasury yield rose 7 basis points to 3.84% after initially falling to 3.68%. That’s the highest since May 26 and the strongest close in three months.

The U.S. tame inflation report eased concerns heading into the Fed meeting decision. Meanwhile, China’s central bank trimmed a short-term rate with optimism growing that Beijing will adopt new fiscal stimulus amid disappointing economic data.

The Dow Jones Industrial Average rose 0.4% in Tuesday’s stock market trading, to the highest point in four months. The S&P 500 index climbed 0.7% and the Nasdaq composite advanced 0.8%, both at fresh 52-week highs. The small-cap Russell 200 jumped 1.2%, a three-month best.

U.S. crude oil prices jumped 3.4% to $69.42 a barrel. Copper futures popped 2.1%. Commodities rallied on China stimulus talk and a weaker dollar.

ETFs

Among growth ETFs, the Innovator IBD 50 ETF (FFTY) climbed 1.4% to a six-month high. The Innovator IBD Breakout Opportunities ETF (BOUT) popped 1.6%. The iShares Expanded Tech-Software Sector ETF (IGV) rose 0.7%, with Unity stock an IGV holding. The VanEck Vectors Semiconductor ETF (SMH) gained 1.4%, with NVDA stock the No. 1 component.

Reflecting more-speculative story stocks, ARK Innovation ETF (ARKK) rallied 2.3% and ARK Genomics ETF (ARKG) jumped 3.3%. Tesla stock is the biggest holding across Ark Invest’s ETFs. Cathie Wood trimmed her TSLA stock stake on Monday. Tesla stock jumped 3.55% to 258.71. It’s now advanced for 13 straight sessions, with the last 12 in above average-average volume, both records.

SPDR S&P Metals & Mining ETF (XME) bounced 2.75%, with FCX stock a notable component. The Global X U.S. Infrastructure Development ETF (PAVE) climbed 1.7%. U.S. Global Jets ETF (JETS) ascended 2.1%. SPDR S&P Homebuilders ETF (XHB) stepped up 1.3%. The Energy Select SPDR ETF (XLE) edged up 0.5% and the Health Care Select Sector SPDR Fund (XLV) nudged 0.5% higher, with VRTX stock a holding. The Industrial Select Sector SPDR Fund (XLI) gained 1.15%, setting a 52-week high.

The Financial Select SPDR ETF (XLF) rose 0.6%. The SPDR S&P Regional Banking ETF (KRE) rebounded 2.25%.

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Nvidia Stock

Nvidia rose 3.9% to 410.22, clearing the bulk of a three-weeks-tight pattern to a record close — and closing above a $1 trillion market cap for the first time. Existing investors could have added a tiny amount to their NVDA stock here, but definitely would have wanted some quick stops to exit the position. Nvidia stock is 13% above its 21-day line and 97% above its 200-day line. With the risks of a Nasdaq pullback rising, NVDA could easily fall back.

LSCC Stock

Lattice Semi stock popped 4.1% to 90.81, a day after retaking the 50-day line, both in higher volume. Investors could have used Tuesday’s move as an early entry, though it backed off an intraday high of 94.25. At this point, investors could wait to see if LSCC stock forges a handle on its consolidation, which currently has a 96.82 buy point, according to MarketSmith analysis.

Unity Stock

Unity Software stock leapt 7.2% to 38.58 in heavy volume yet again. Shares stopped just short of a 39.45 cup-with-handle buy point intraday, but did break the downtrend of the handle, offering an early entry.

VRTX Stock

Vertex stock edged up 0.4% to 342.10. On Monday, shares rose 1.9% in strong trade, bouncing above the 21-day line and the 50-day. That offered an early entry in a flat base within a base-on-base formation. The official buy point is 354.46.

FCX Stock

Copper mining giant Freeport-McMoRan stock jumped 5.3% to 39.82, rebounding from the 50-day line and breaking a downtrend going back to the late January peak. Investors could have used that move as an early entry into FCX stock.

Market Rally Analysis

The stock market rally is showing increasing strength and breadth, though techs are starting to look extended.

The Nasdaq is now 9% above its 50-day moving average, with the Nasdaq 100 up 10.1% over the key level. At 10%, the risks of a pullback rise, with a growing chance of a more-significant pullback.

Advancers led declines by 2-to-1, with new highs crushing new lows. The Invesco S&P 500 Equal Weight ETF (RSP) climbed 0.8%, also hitting a three-month high like the Russell 2000.

The First Trust Nasdaq 100 Equal Weighted Index ETF (QQEW) ran up 1%. That outpaced the Nasdaq 100’s 0.8% gain, even with megacaps Tesla and Nvidia charging higher.

Chips, software and homebuilders have been leaders for some time. Now industrials, airlines, miners and China names are making moves, though many are already extended.

Some medical products firms and biotechs are near buy points without being extended, along with some casino and gaming plays. But that also means that many haven’t taken part in the market’s advance over the past few weeks.

A Nasdaq-led pullback would not be a surprise, and would probably be healthy. The wider breadth and leadership suggests that the market rally is in better condition to handle a tech pause or modest retreat.

The Fed announcement and Powell’s comments are sure to swing markets Wednesday afternoon. That could continue in a second-day reaction Thursday.

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What To Do Now

The stock market rally continues to power higher, with a wider array of leaders.

But a lot of leading stocks, even newer ones such as industrials and travel plays, look extended, even from their moving average. Many growth plays are highly extended.

What investors need now is patience. If you haven’t jumped on board many of these names, you probably need to wait for new entries to develop. For, say, industrials that have run up to or near buy points, handles or brief consolidations could create new buying chances. For many techs, a longer pullback or pause may be needed to let moving averages catch up or new bases form.

If you do own some big winners, make sure you have an exit strategy.

With the market rally’s breadth and leadership expanding, investors have to keep up. Keep updating your watchlists, which should have expanded significantly in the past few weeks.

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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