Market Rally Action Is Dangerous; Watch Tesla, These EV Chip Stocks

The stock market rally showed mixed action last week.

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Dow Jones futures will open Sunday evening, along with S&P 500 futures and Nasdaq futures. Tesla (TSLA) and several chip stocks are worth watching.

The Nasdaq hit a 2023 high last week, but ended with slim gains. The S&P 500 and Dow Jones fell for the week, while market breadth remained weak.

The stock market rally showed mixed action last week. Also, not many stocks have been offering buy signals, and some of those have quickly wobbled.

But a choppy market rally is dangerous for investors. It’s still a time to be mostly in cash.

Tesla stock is trying to bounce back, but faces key resistance as it builds the right side of a base.

EV-related chip plays On Semiconductor (ON), Axcelis Technologies (ACLS) and Aehr Test Systems (AEHR) are all trading near possible entries. Meanwhile, Advanced Micro Devices (AMD), Lam Research (LRCX) and Broadcom (AVGO) are chip giants near potential buy points.

Also pay attention to Sarepta Therapeutics (SRPT) on Monday. SRPT stock was halted throughout Friday’s session, as an FDA advisory panel discussed whether to recommend Sarepta’s gene therapy for patients with Duchenne muscular dystrophy. The panel narrowly voted 8-6 in favor of an accelerated approval. The FDA doesn’t have to follow the committee’s vote, but takes it into consideration. SRPT stock tumbled 8.2% for the week through Thursday as FDA briefing documents suggested the therapy might be rejected.

The video embedded in the article discussed the market rally’s mixed messages and analyzed ON stock, Trade Desk (TTD) and Kinsale Capital (KNSL).

Dow Jones Futures Today

Dow Jones futures open at 6 p.m. ET on Sunday, along with S&P 500 futures and Nasdaq 100 futures.

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 continued to trade tightly, with mixed action that looked weaker by Friday’s close.

The Dow Jones Industrial Average fell 1.1% in last week’s stock market trading. The S&P 500 index dipped 0.3%. The Nasdaq composite rose 0.4%. The small-cap Russell 2000 declined 1%.

The 10-year Treasury yield rose 2 basis points to 3.46%, rebounding on Friday.

U.S. crude oil futures fell 1.8% to $70.04 a barrel last week, down 15.1% over four weeks.

Copper prices slumped 4%. Gold retreated 0.1%, but fell 1.1% over the last three days. Silver plunged 6.8%.

ETFs

Among growth ETFs, the Innovator IBD 50 ETF (FFTY) edged up 0.3% last week, while the Innovator IBD Breakout Opportunities ETF (BOUT) dipped 0.7%.  The iShares Expanded Tech-Software Sector ETF (IGV) rose 1.4%. The VanEck Vectors Semiconductor ETF (SMH) fell 1.2%%. AMD stock is a major SMH holding, with Lam Research, Broadcom and On Semiconductor also components.

Reflecting more-speculative story stocks, ARK Innovation ETF (ARKK) climbed 0.8% last week and ARK Genomics ETF (ARKG) added 0.5%. Tesla stock is the No. 1 holding across Ark Invest’s ETFs.

SPDR S&P Metals & Mining ETF (XME) slumped 2.6%% last week. The Global X U.S. Infrastructure Development ETF (PAVE) fell 1%. U.S. Global Jets ETF (JETS) descended 1.3%. SPDR S&P Homebuilders ETF (XHB) closed just above break-even. The Energy Select SPDR ETF (XLE) skidded 2.1%. The Health Care Select Sector SPDR Fund (XLV) gave up just over 1%.

The Financial Select SPDR ETF (XLF) fell 1.3%.

The SPDR S&P Regional Banking ETF (KRE) slumped 5.2%. PacWest Bancorp (PACW) plunged 23% Thursday after disclosing significant deposit losses in the week ended May 5.

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Tesla Stock

Tesla fell 1.2% to 167.98 last week, continuing to trade around the 21-day moving average. On Friday, shares opened strong but reversed lower from near the 50-day moving average.

If Tesla stock makes some upward progress, it’ll have a 207.89 buy point from a double-bottom base. The base has formed below the 200-day line, but the buy point is now above the long-sliding 200-day.

TSLA stock bulls could spy aggressive entries, such as the 50-day line or perhaps a down-sloping trendline from the top of the three-month consolidation, but the risks may be elevated, especially in the current market.

On Friday, Tesla CEO Elon Musk confirmed that Linda Yaccarino, who just stepped down as NBC Universal’s ad chief, will be Twitter CEO. Musk had tweeted Thursday afternoon that he had found a new leader for the social site. That sent Tesla stock rallying into the close.

Yaccarino could help revive Twitter’s ad revenue. For TSLA stock investors, Musk may have more time to spend on Tesla, though he’ll will remain in charge of Twitter’s product and technology.

Chip Stocks To Watch

On Semiconductor is a Tesla chip supplier. ON stock has been trading relatively tightly just above the 50-day moving line within a three-month consolidation. On Friday, On Semiconductor stock tried to clear its recent trading, flashing an early entry, but shares quickly erased gains. Investors could still use a move above the May 8 high of 81.72 to start a position.

That’s probably a safer bet that buying ON stock on a breakout, with an 87.65 buy point.

Onsemi is a major customer for Aehr Test Systems’ chip-testing equipment. AEHR stock sold off hard from late March to late April, but found support at the 200-day line. Shares have moved higher since then, rising 2% to 27.67 this past week. But Aehr stock is still below the 50-day line. A decisive retaking of the 50-day line would offer an aggressive entry for AEHR stock in a new, emerging consolidation. As with ON stock, it’s probably safer to buy Aehr Test Systems from an early entry vs. a traditional buy point.

ACLS stock was a big chip leader in 2023, but also retreated from late March. Shares of the EV-exposed chip-equipment maker tumbled on May 4 following Q1 earnings, but closed off lows. Axcelis stock has moved back up to the 50-day line, where it’s hitting resistance. Retaking the 50-day line would also break a down-sloping trendline, providing two reasons for an early entry. ACLS stock has a 136.48 consolidation buy point. Axcelis rose 1.6% to 122.11 for the week.

AMD stock rocketed 19% in the six sessions to May 11, offering an early entry on May 8 as it raced above the 50-day line. On Friday, shares fell 1.9% to 95.26%. Ideally, the chip giant would forge a handle in its cup base, which currently has a 102.53 buy point.

LRCX stock edged down 0.5% to 527.10 for the week. The chip gear giant boasts a 548.95 flat-base buy point, trading above the 21-day and 50-day lines in the past few weeks. Investors could use 536.60 as an early entry. That’s a four-weeks-tight pattern buy point on a weekly chart.

AVGO stock has a 648.60 buy point from a 7%-deep flat base, according to MarketSmith analysis. Shares rose 0.2% to 631.15, closing just above the 50-day line. A decisive move above the 50-day, perhaps crossing a down-sloping trendline, would offer an early entry.

Market Rally Analysis

The stock market rally had an underwhelming week. On Wednesday, the Nasdaq composite hit a 2023 high, making a little more progress Thursday and even early Friday. But the Nasdaq pulled back Friday, ending with modestly weekly gains.

The S&P 500 faded for slim weekly losses, but did hold its 21-day line. The Dow Jones tested its 50-day moving average, an area of support for the major indexes in recent weeks. Both indexes lost ground for a second straight week.

Even the Nasdaq’s relative outperformance was largely due to Google parent Alphabet (GOOGL) and other megacap stocks. The Nasdaq 100 climbed 0.7% for the week.

The First Trust Nasdaq 100 Equal Weighted Index ETF (QQEW) dipped 0.3%, the fourth straight slim weekly decline. But it’s still holding its 50-day.

The Invesco S&P 500 Equal Weight ETF (RSP) lost 1.1%. RSP is pinned below all its moving averages.

Other metrics show weak market breadth, including advance/decline lines and new highs vs. new lows.

Not many stocks have offered buying opportunities. Several recent earnings gap-ups have been working, though not all. Other stocks, such as On Semiconductor, Trade Desk and New Relic (NEWR), have teased buy points but then faltered, especially TTD. Those stocks may still work, but it’s tough to make headway.

The stock market continues to deal with economic concerns, with recession risks now trumping inflation. The banking crisis is not settled. And the debt-ceiling limit could be a bigger market concern. A U.S. sovereign default is likely by early June if Congress and President Biden can’t reach a deal.

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What To Do Now

The major averages didn’t have a good week, and they look better than equal-weight ETFs and market internals.

Investors should have relatively light exposure. If you have some positions that are working, then you’ll likely be more invested than others. But even then, there’s no reason to be aggressive.

A sideways market is far more dangerous than a bear market. When the indexes and leading stocks are breaking down, it’s clear that cash is king. But a choppy, rangebound market offers just enough strength to lure investors in, only to chop them up.

Investors should focus on preparing for the next powerful uptrend. That big bull market rally could come next week, next month or next year. Despite the market’s woes and lack of stocks to buy, a good number of stocks are setting up or close to doing so. So have your watchlists ready.

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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