Market Rally Shakeout May Be Bullish Signal; FDIC Set To Take Over First Republic

The stock market rally fell sharply during the past week, but rebounded to close with solid gains, a shakeout that could set the stage for a stronger advance.  An FDIC takeover of First Republic Bank (FRC) may come this weekend, with a possible quick sale to giants such as JPMorgan Chase.

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Dow Jones futures will open on Sunday evening, along with S&P 500 futures and Nasdaq futures.

The major indexes tumbled on Tuesday as First Republic Bank revived banking fears. But the major indexes found support and rebounded. Initially, megacaps such as Meta Platforms (META) and Microsoft (MSFT) led the comeback, but breadth improved late in the week, especially Friday.

The market rally is looking healthier, but remains “under pressure.”  Investors still need to see a little more market strength and a lot more buying opportunities.

Earnings season remains heavy this coming week, with Advanced Micro Devices (AMD) out late Tuesday and Apple (AAPL) due on Thursday. Another Fed rate hike is on tap Wednesday, along with major economic data in the coming week. A big question is whether Fed chief Jerome Powell signals that the central bank will pause rate hikes.

FDIC Seen Taking Over First Republic

Banking giants including JPMorgan Chase (JPM) and PNC Financial Services (PNC) are looking to buy First Republic following a government seizure, The Wall Street Journal reported Friday night, citing sources.

FRC stock had already plunged 34% in heavy after-hours trading Friday, following a Reuters report that authorities were set to seize and close First Republic Bank, with the FDIC taking the California-based bank under receivership.

First Republic stock crashed 75% during the week to fresh record lows, fueled by a massive Q1 deposit outflow. Despite efforts to engineer a quasi-rescue by big banks, expectations of an FDIC takeover grew during the week.

An FDIC takeover almost certainly would protect all First Republic Bank deposits, but FRC stock investors might end up with nothing.

While regional banks tumbled Tuesday, they pared weekly losses significantly. First Republic’s deposit exodus was in a class of its own.

A swift resolution of First Republic situation could restore confidence in the banking sector and buoy market sentiment — if there are no more shoes to drop.

Monday Earnings, Sales

Meanwhile, EV-focused chipmaker On Semiconductor (ON) will report before Monday’s open. ON stock fell solidly this past week along with other EV-exposed chipmakers amid concerns about EV demand.

China EV startups Li Auto (LI), Nio (NIO) and XPeng (XPEV) will report April deliveries early Monday. Weekly data show strong sales for Li Auto, while Nio and Xpeng struggle.

China EV and battery giant BYD (BYDDF) will release April sales data early in the week. The Tesla (TSLA) rival reported strong Q1 earnings on Thursday.

BYD stock is in range from an early entry. LI stock is trying to regain key levels. XPeng and Nio stock face significant hurdles.

Also, Arista Networks (ANET) is on tap to report first-quarter earnings Monday night. ANET stock, a big supplier for Meta Platforms and Microsoft, found support at its 50-day line this past week.

META stock is on IBD Leaderboard, with DXCM stock an earnings options play. MSFT stock is on IBD Long-Term Leaders. ANET stock is on the IBD 50. AMD, Arista Networks and DXCM stock are on the IBD Big Cap 20. Arista Networks was Friday’s IBD Stock Of The Day

The video embedded in the article discussed a big market week and analyzed AMD stock, InMode (INMD) and Dexcom.

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 looked ugly on Tuesday but bounced back for gains on the major indexes.

The Dow Jones Industrial Average rose 0.9% in last week’s stock market trading. The S&P 500 index also climbed 0.9%. The Nasdaq composite bounced 1.3%. The small-cap Russell 2000 fell 1.3%

The 10-year Treasury yield fell 12 basis points during the week to 3.45%.

U.S. crude oil futures fell 1.1% to $76.78 a barrel in the past week, even with Friday’s 2.7% bounce. Gasoline futures dipped 0.9% for the week, but 9.1% in the past two weeks.

ETFs

Among growth ETFs, the Innovator IBD 50 ETF (FFTY) sank 3.6% last week, with several components suffering huge earnings losses. The Innovator IBD Breakout Opportunities ETF (BOUT) edged up 0.3%. The iShares Expanded Tech-Software Sector ETF (IGV) sank 1.45%, with Microsoft a big IGV component. The VanEck Vectors Semiconductor ETF (SMH) dipped 0.4%. AMD stock is a major SMH holding with ON stock also in the ETF.

Reflecting more-speculative story stocks, ARK Innovation ETF (ARKK) slumped 4.5% last week and ARK Genomics ETF (ARKG) 5.3%. Tesla stock is the No. 1 holding across Ark Invest’s ETFs, with Cathie Wood adding more TSLA shares in the past few weeks. Ark also owns a small BYD stock stake.

SPDR S&P Metals & Mining ETF (XME) retreated 1.6% last week. The Global X U.S. Infrastructure Development ETF (PAVE) finished just above break-even. U.S. Global Jets ETF (JETS) descended 1%, but came well off lows. SPDR S&P Homebuilders ETF (XHB) popped 2.2%. The Energy Select SPDR ETF (XLE) edged up fractionally. The Health Care Select Sector SPDR Fund (XLV) slipped 0.6%, but rebounded from lows. DXCM stock is an XLV component.

The Financial Select SPDR ETF (XLF) dipped 0.15%, but rebounded to close just below its 50-day. The SPDR S&P Regional Banking ETF (KRE) fell 0.6%, but slashed losses after hitting its worst levels since late 2020. FRC stock is a KRE holding.

Five Best Chinese Stocks To Watch Now

Market Rally Analysis

The stock market rally had a wild week, with the major indexes testing support but ultimately closing with solid gains.

The Nasdaq came down to its 50-day line on Tuesday, as First Republic spooked investors once again. The S&P 500 and Dow Jones are near that level, undercutting their 21-day lines by midweek.

Worse, the First Trust Nasdaq-100 Equal Weighted Index ETF (QQEW) and Invesco S&P 500 Equal Weight ETF (RSP) tumbled below their 50-day lines on Tuesday. The latter also skidded below its 200-day as these ETFs kept falling Wednesday, even as Microsoft boosted the Nasdaq.

Meta stock and other tech titans fueled a strong gain Thursday. QQEW and RSP lagged QQQ and SPY, respectively, but still did well. On Friday, the indexes rose modestly, with RSP outperforming, roaring back above its 50-day line.

The Nasdaq didn’t quite get above the April 18 intraday high, but did have its best close since September. The S&P 500 and Dow Jones topped their April peaks with all the major indexes near 2023 highs.

The SMH chip ETF, which tumbled to its worst levels since mid-March, slashed weekly losses but was still below the 50-day line. A few names, such as Lam Research (LRCX) and AMD stock, are setting up near entries. But many chip plays had nasty sell-offs, including some huge earnings drops.

Massive earnings losses among leading stocks have been all-too common in recent days. Market leadership remains narrow. Not many stocks are flashing buy signals or are on the cusp of doing so. Several of those have earnings on tap, including AMD, Floor & Decor (FND), InMode (INMD) and ANET stock.

Apple stock looks extended on a daily chart, but on a weekly chart, investors could view it as just above a buy point from a long cup-with-handle or double-bottom base. The handle also shows up as a three-weeks-tight pattern, according to MarketSmith analysis.

After the past week’s shakeout the market rally could be poised for a stronger advance. If the major indexes break to 2023 highs with any sort of breadth, the market rally may have some room to run with major earnings and the Fed meeting in the rear view mirror. But stocks could hit resistance yet again in the coming days.

Time The Market With IBD’s ETF Market Strategy

What To Do Now

The stock market rally has been difficult to navigate.

Investors likely cut exposure in the past week as many stocks erased gains or flashed sell signals. Despite the major indexes closing higher, there weren’t many opportunities to beef up positions. That’s OK. If the market rally really strengthens, those chances will come. If the indexes whipsaw with weak breadth, you’ll be glad you’re mostly in cash.

Add exposure gradually as conditions improve. Be mindful of earnings reports.

While the end-of-week rebound didn’t trigger a lot of breakouts and early entries, many stocks did start to move into position. So have your watchlists ready.

Many leading stocks, including some big winners from earlier in the year, flashed sell signals in the past week or so

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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