Dow Jones Reverses Lower On Fed, Recession Fears; Tesla, Megacaps Hit Resistance

Dow Jones futures fell slightly after hours, along with S&P 500 futures and Nasdaq futures.

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

Apple (AAPL), Microsoft (MSFT), Google parent Alphabet (GOOGL) and Tesla (TSLA) all hit resistance at key levels Wednesday. None of these megacaps is near a buy point.

Some leading stocks struggled, such as Celsius (CELH), while others pulled back modestly with a few moving higher.

Alcoa reported earnings after the close. The aluminum giant reported an in-line quarterly loss while sales came up short. AA stock fell solidly in extended trade. Shares have surged since late September, recently retaking their 200-day line.

Netflix (NFLX) headlines Thursday earnings reports. NFLX stock drifted lower Wednesday, not far from multimonth highs. Netflix earnings, subscriber results and guidance also will be important for streaming plays such as Disney (DIS).

Dow Jones Futures Today

Dow Jones futures fell 0.1% vs. fair value. S&P 500 futures slipped 0.1% and Nasdaq 100 futures declined 0.1%.

Crude oil futures sank 1%.

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

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Stock Market Rally

The stock market rally started Wednesday with modest to solid gains, but soon turned solidly lower as investors digested economic data and Fed comments.

Before the market open, the producer price index, retail sales and industrial production all showed significant declines in December, far more than expected. Cooler inflation and a rapid deceleration in the economy bolstered expectations for slower Fed rate hikes and a halt in the near term, but also raised recession fears.

St. Louis Fed President James Bullard and Cleveland Fed President Loretta Meister both said they expect the central bank to hike rates above 5%. That’s in line with Fed forecasts for a 5.1% “terminal rate” but slightly more than markets currently expect.

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

Dow Jones Industrial Average Tumbles

The Dow Jones Industrial Average skidded 1.8% in Wednesday’s stock market trading. The S&P 500 index tumbled 1.6%. The Nasdaq composite fell 1.4%. The small-cap Russell 2000 shed 1.6%.

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

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

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

The 10-year Treasury yield plunged 16 basis points to 3.37%, a four-month low. The two-year Treasury yield, more closely tied to Fed policy, slid to 4.11%, hitting the lowest level since early October.

Markets have essentially locked in on a quarter-point Fed rate hike on Feb. 1. Investors strongly favor another quarter-point hike in late March, bringing the fed funds rate to 4.75%-5%. But there is now a 25% chance of no move then.

U.S. crude oil prices dipped 0.9% to $79.48 a barrel, reversing lower from $82.38 intraday. Natural gas tumbled 7.7%. Copper prices pared intraday gains to close up just 0.3%, but are up 13% in a nine-day winning streak.

ETFs

Among growth ETFs, the Innovator IBD 50 ETF (FFTY) sank just over 1%. The iShares Expanded Tech-Software Sector ETF (IGV) gave up 1.25%, with MSFT stock a major holding. The VanEck Vectors Semiconductor ETF (SMH) slipped 0.6%.

Reflecting stocks with more speculative stories, the ARK Innovation ETF (ARKK) slumped 2.9% and ARK Genomics (ARKG) fell 1.6%. TSLA stock remains a major holding across Ark Invest’s ETFs. Cathie Wood’s Ark has loaded up on Tesla in recent weeks.

The SPDR S&P Metals & Mining ETF (XME) retreated 1.7%, with AA stock a notable component. U.S. Global Jets (JETS) descended 1.4%. SPDR S&P Homebuilders (XHB) declined 1%. The Energy Select SPDR ETF (XLE) ceded 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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Market Rally Analysis

The stock market rally suffered a downside reversal on Wednesday following Tuesday’s mixed session.

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

The Russell 2000 came even closer to its late-2022 highs on Wednesday but reversed lower for a second straight day, this time with a more significant swing.

The Nasdaq composite, which had rallied for seven sessions, fell back modestly. But it’s still above its 50-day line.

While markets cheer cooler inflation data and slowing job and wage growth, they’re not keen on an actual recession. So while investors initially celebrated the sharp drop in producer prices, they were unnerved by hawkish Fed comments given the surprisingly weak retail sales and industrial production data.

The stock market rally arguably was due for a pullback in any case. It would have been nice for the S&P 500 to hold its 200-day and the Dow Jones to find support at the 50-day, but they haven’t decisively broken lower.

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

It’s not a surprise that as the S&P 500 hit resistance, megacap names such as Apple, Microsoft, Google and Tesla fell back from around key levels.

Leading stocks generally retreated. Some tested or undercut recent buy points, such as CELH stock. But Celsius, which tumbled 9.6% to close below its 50-day line, was unusually hard hit.

Many other leaders that were looking extended need a market pause to form handles or pull back to moving averages.

Meanwhile, China stocks are pulling back this week after a big reopening rally.

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What To Do Now

Just as the stock market rally started gaining momentum, Wednesday’s pullback came along. But after a strong run starting on Jan. 6, the major indexes and leading stocks generally just gave up a fraction of recent gains. That’s in contrast to recent months, in which the indexes would have one or two strong days that would be quickly rolled back.

Still, this is why you need to be patient, adding exposure gradually, and only if the market draws you in. Do not buy stocks that are extended, and don’t get too concentrated in a specific stock, sector or theme.

If you modestly added exposure over time in the past several sessions, you’re probably doing OK. But if you went from, say, 30% to fully invested on Tuesday afternoon-Wednesday morning, you could have taken some notable  losses by Wednesday’s close.

Ideally, the market pullback will be modest and create new, safer buying opportunities. But be wary of new buys until this market action shakes out. Use this time to update your watchlists, looking for new setups.

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

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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