Stock Market Rally Suffers Ugly Outside Week; Here’s What To Do Now

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

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The stock market rally suffered heavy damage this week in the wake of a hawkish Fed outlook and weak economic data that raised concerns that the Federal Reserve will drive the economy into a recession. The Nasdaq and S&P 500 index closed the week below their 50-day moving averages.

Megacap stocks remain a drag on the major indexes, especially Apple (AAPL) and Tesla (TSLA), with TSLA stock plunging to fresh bear market lows. Amazon.com (AMZN) and Google parent Alphabet (GOOGL) aren’t too far away from their lows. Microsoft didn’t lose too much for the week but fell back from the 200-day line. Nvidia (NVDA), which had been part of a chip rebound, reversed lower, back below key support.

But the megacaps aren’t hiding underlying strength. Most stocks that had flashed buy signals in recent days and weeks turned south. Leading sectors also suffered.

Insulet (PODD), Commercial Metals (CMC), Elf Beauty (ELF), Peabody Energy (BTU) and Dow Jones giant Caterpillar (CAT) are holding up relatively well. None are actionable right now, however.

Investors should be wary of making any buys in the current market, but focused on trimming exposure and building up watchlists.

The video embedded in this article reviewed the market action in depth, while also analyzing Insulet, Elf Beauty and CAT stock.

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 soared Tuesday morning, but then sold off hard, ending the week with sharp losses.

The Dow Jones Industrial Average fell 1.7% in last week’s stock market trading. The S&P 500 index shed 2.1%. The Nasdaq composite slumped 2.7%. The small-cap Russell 2000 gave up 2.4%.

The 10-year Treasury yield fell 9 basis points to 3.48%. Despite the hawkish Fed talk, markets expect a quarter-point hike in February and in March, but with a growing chance that there will no move in March.

U.S. crude oil futures rose nearly 5% to $74.29 a barrel last week.

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ETFs

Among growth ETFs, the iShares Expanded Tech-Software Sector ETF (IGV) erased big early gains to finish the week off 0.5%, with MSFT stock a major holding. The VanEck Vectors Semiconductor ETF (SMH) staged its own outside, downside reversal week, losing 2.9%. Nvidia stock is a top SMH component.

Reflecting more-speculative story stocks, ARK Innovation ETF (ARKK) skidded 4% last week, just above a five-year low. ARK Genomics ETF (ARKG) dipped 0.4%. Tesla stock remains a major holding across Ark Invest’s ETFs.

SPDR S&P Metals & Mining ETF (XME) sank 2.6% last week. The Global X U.S. Infrastructure Development ETF (PAVE) lost 2.6%. U.S. Global Jets ETF (JETS) descended 3.6%. SPDR S&P Homebuilders ETF (XHB) edged up 0.4%, but closed near weekly lows. The Energy Select SPDR ETF (XLE) rebounded 2% and the Financial Select SPDR ETF (XLF) gave up 2.5%. The Health Care Select Sector SPDR Fund (XLV) shed 1.8% after nearing record highs on Tuesday.

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Dow Jones tech titan Apple stock sold off 5.4% for the week, to 134.51. AAPL undercut October-November lows, with the June bear market low of 129.04 up next. Fellow Dow component Microsoft dipped 0.3% to 244.69, but after retreating from 263.92 Tuesday morning as it ran into the 200-day line. Amazon stock fell just 1.4% to 87.66, but tumbled from weekly highs of 96.25 to close near the Nov. 9 bear market low of 85.87. Google stock slumped 2.8%, reversing lower from Tuesday’s highs. Nvidia moved above its 50-day line early in the week, but ended up down 2.5%.

Tesla stock was the big loser, plunging 16.1% to 150.23, the lowest since November 2020. It was the worst weekly decline since the Covid crash in March 2020. China demand concerns, Elon Musk’s latest TSLA stock sales and Musk’s Twitter focus are all weighing on shares.

Market Rally Analysis

In a few days, the stock market rally abruptly shifted from moving above a trading range to tumbling below. The weekly percentage losses on the major indexes were large, but the damage was far worse.

Soon after Tuesday’s open, the major indexes all hit rally highs on a tame inflation report, with the S&P 500 back above its 200-day line and the Dow Jones at its best levels in nearly eight months. But the indexes slashed gains, with the S&P 500 closing below the 200-day. On Wednesday, the key indexes reversed lower as the Federal Reserve and Fed chief Jerome Powell signaled several more rate hikes ahead.

On Thursday, the selling intensified amid weak economic data that fanned recession fears. The Nasdaq and Russell 2000 fell below their 50-day lines, while the S&P 500 and Dow Jones broke below their 21-day lines. All sank to their worst levels in over a month, undercutting weeks of sideways trading.

On Friday, the S&P 500 tumbled below its 50-day line. The Dow is nearly there.

It was a big, negative outside week for all the major indexes, with the highs and lows surpassing the range over the prior four weeks.

Leading stocks have been pummeled, with few exceptions. Industrials, solar, medicals, travel and various chip and networking names are all coming under modest-to-intense pressure.

Megacap stocks remain clear laggards overall. Tesla stock continues to plunge to fresh two-year lows. Amazon stock is just above bear-market lows while Google is moving in that direction. AAPL stock tumbled to the lowest level in nearly six months, with bear lows in sight.

Microsoft stock and Nvidia may not be laggards, but they aren’t leading either. Both are below their 200-day lines.

Perhaps this uptrend is a bear market rally that’s run its course, with the indexes headed back toward their October lows. Perhaps the S&P 500 will rebound quickly or be rangebound for an extended period.

The only thing that’s clear is that the market is not acting well right now.

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What To Do Now

Investors should be reducing exposure due to the deteriorating overall market and the performance of most individual stocks.

While under pressure, it’s still a market rally. A few good days could shore up confidence in the uptrend and bring more stocks back to buy areas. Of course, even in that scenario, investors should be wary of new buys, given the rally’s pattern of pulling back and erasing solid gains.

So stay engaged. Keep working on watchlists. Focus on stocks that are holding key moving averages and support levels and generally showing strong relative strength, such as Caterpillar, Insulet and ELF stock.

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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