Dow Jones futures fell solidly early Thursday, along with S&P 500 futures and Nasdaq futures, as investors continued to weigh in on Wednesday’s Federal Reserve report. Weak Chinese economic data and upcoming US economic news were also in the spotlight, along with Elon Musk’s latest Tesla sales.
The stock market rally turned lower on Wednesday after the Federal Reserve hit 5.1% as the new target maximum rate and Fed chief Jerome Powell demanded “substantially more evidence” that inflation is coming under control.
But stocks pared losses in a whipsaw action as investors also weighed in on additional comments from Powell and hopes for even slower rate hikes in 2023. Tesla ( TSLA ) CEO Elon Musk revealed late Wednesday that he sold about $3.6 billion worth of TSLA stock this week as the stock plunged to new lows in a bear market. Apple ( AAPL ) dropped below its 50-day moving average.
But solar stocks were strong, with the Invesco Solar ETF (TAN) flashing a buying opportunity, as Enphase Energy (ENPH), SolarEdge technology (SEDG), The first solar (FSLR) and Array Technologies (ARRY) everyone stood up.
Fed Rate Increase, Peak Rate
The central bank raised the Fed Funds rate by 50 basis points to 4.25%-4.5% on Wednesday afternoon as expected. But policymakers also now see a top rate of 5.1% in the new quarterly projections, up from 4.6% at the Fed’s September meeting. Fed chief Powell has said in recent weeks that the maximum rate is likely to be headed higher. But 5.1% was above market expectations, especially after Tuesday’s relatively tame inflation report.
Fed chief Powell Hawkish, Dovis
Powell said shortly after the announcement and projections from the Fed meeting that the full impact of this year’s Fed rate hikes had not yet been felt, “but we have to do more.” The Fed chief noted a “welcome reduction” in price gains in the last two CPI reports, but said policymakers needed “substantially more evidence.” to ensure that inflation is on a sustained downward path.”
Powell did not rule out another rate cut to just a quarter of a point in February. But he emphasized that more important is where the Fed funds rate peaks and how long it stays high. Notably, Powell sees no rate cut in 2023.
But he also said, “Our politics are getting to a pretty good place now.”
Markets are pricing in a 72% chance of a quarter-point Fed rate hike to 4.5-4.75%, up from 60% on Tuesday. Notably, investors expect another quarter-point increase in late March, but now see a decent chance it won’t move at all.
The Fed continues to see growth slowing in 2023, not a true recession.
The major indexes, all headed slightly higher ahead of the Fed meeting announcement and Powell’s speech, fell in volatile trading. For the second straight session, the S&P 500 moved above its 200-day moving average, but closed below that key level.
Investors should be cautious about adding exposure in the current market when indices are volatile and near key levels.
China and US economic data
China’s retail sales fell 5.9% in November from a year earlier, a much worse result than expected, and worsened from a 0.5% drop in October. Industrial production rose 2.2%, with growth slowing much more than expected from October’s 5%.
China’s Covid lockdown has taken a serious toll on the economy. COVID rules have been loosening rapidly over the past few weeks, but now China is bracing for a massive wave of infections.
Investors will get US retail sales data for November, the Philly Fed’s December manufacturing index and weekly jobless claims at 8:30 a.m. ET. November industrial production will follow at 9:15 a.m. ET.
Dow Jones Futures Today
Dow Jones futures fell 0.7% versus fair value. S&P 500 futures fell 0.9% and Nasdaq 100 futures fell 1.1%.
The Bank of England and the Swiss National Bank raised rates by 50 basis points on Thursday as expected. The European Central Bank does the same before the US market opens.
The yield on 10-year government bonds fell by 4 basis points to 3.46%.
Remember that overnight action in Dow futures and elsewhere does not necessarily translate into actual trading on the next regular exchange.
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Stock market rally
The stock market rallied ahead of the Fed meeting announcement before turning lower in volatile action for the rest of the session.
The Dow Jones Industrial Average fell 0.4% in Wednesday trading. The S&P 500 index weakened by 0.6%. The Nasdaq Composite lost 0.8%. The small-cap Russell 2000 advanced 0.7%.
Apple shares fell 1.55% to 143.21, back below the 50-day moving average.
U.S. crude oil prices rose 2.5% to $77.28 a barrel.
The yield on the 10-year government bond remained unchanged at 3.5%.
Among the top ETFs, the Innovator IBD 50 ETF ( FFTY ) fell 0.4%, while the Innovator IBD Breakout Opportunities ETF ( BOUT ) edged down 0.1%. The iShares Expanded Tech-Software Sector ETF ( IGV ) lost 0.2%. The VanEck Vectors Semiconductor ETF ( SMH ) fell 1.7%.
Looking at more speculative story stocks, the ARK Innovation ETF ( ARKK ) gave up 1% and the ARK Genomics ETF ( ARKG ) gave up 0.7%. Tesla stock is the top holding across Ark Invest’s ETFs.
The SPDR S&P Metals & Mining ETF ( XME ) retreated 0.9%. The SPDR S&P Homebuilders ETF ( XHB ) fell 0.5%. The Energy Select SPDR ETF (XLE) retreated 0.6% and the Financial Select SPDR ETF (XLF) fell 1.25%. The SPDR fund in the selected healthcare sector (XLV) strengthened by 0.2%.
The Invesco Solar ETF rose 1.8% to 82.61 on Wednesday. TAN ETF has an 84.28 cup handle buy point, but investors could have entered earlier from the 21-day moving average.
Right now, solar stocks are generally moving higher collectively, so TAN is a good way to play the sector’s upside with less individual stock risk.
Enphase Energy, First Solar and SEDG stock are the three largest components, accounting for nearly a third of TAN’s weight.
ENPH shares are now slightly extended from their own mug-handled buy point, according to MarketSmith analysis. The SEDG stock is also extended from the grip entry. FSLR shares are bouncing off their 10-week range, offering a fresh buying opportunity.
Array Technologies is also part of TAN. ARRY shares jumped 8.3% to 23.55, just below a cup-handled 23.60 buy point. However, the stock is 12.7% above the 21-day and 26% above the 50-day, making buying ARRY stock riskier, especially in the current market.
Tesla vs. BYD: Which EV Giant is better to buy?
Shares of TSLA fell 2.6% to 156.80 on Wednesday. Shares are now down 12.4% for the week and continue to set two-year lows. Tesla shares peaked at 414.46 in November 2021.
Shares of TSLA were down 1% in premarket trading.
Late Wednesday, Elon Musk disclosed that he had sold nearly 22 million Tesla shares for about $3.6 billion in the three days ending Dec. 14. Since the stock peaked in November 2021, Musk has sold more than $39 billion worth of Tesla stock.
Trading volume was particularly strong this week, with Tuesday’s trading the highest in 13 months.
Earlier Wednesday, Goldman Sachs cut its price target on TSLA stock and lowered Tesla’s Q4 supply forecast. Morgan Stanley sees Tesla stock as a top performer for 2023, but warned that overall “the brakes will screech on EV demand.”
If you covered the TSLA ticker and just looked at the chart, you would just keep going.
Top five Chinese stocks to watch
Market rally analysis
The last two days are a great example of how it’s not the news, it’s the market’s reaction to the news.
On Tuesday, a cooler-than-expected CPI inflation report sent stocks into a tailspin, but they quickly pared gains.
The central bank raised its forecast for the Fed’s maximum rates by more than expected on Wednesday afternoon. Fed chief Powell made it clear that inflation needs to fall much more, although he also gave more dovish signals. The major indexes sold off hard but then pared losses, briefly turning positive before retreating again.
The S&P 500, above its 200-day line for the second straight session, failed to close above that key level and turned lower this time. But it found support at the 21-day line, which is closing the gap behind the 200-day.
The Dow Jones and Nasdaq also successfully tested their 21-day lines. The Russell 2000, which has become a laggard, fell back to its 50-day mark.
Despite the disappointment from Tuesday’s opening high, the major indexes are all up 1.6% for the week, while the Russell 2000 is up 1%.
The stock market often reacts to a Fed meeting the next day, especially with such a big move. Dow Jones futures suggest this is happening.
Time The Market with the IBD ETF Market Strategy
A stock market rally gives no reason to add exposure. In the past, indices would at least have a strong session to lure investors and then chop them up over the next few sessions with steady losses.
But right now, the major indexes can’t hold the gain.
If you’re buying on strength, there’s a good chance you’re buying at a peak in the near future. If you are buying weakness, you may be jumping on a sinking ship.
It is better to wait until the major indices show signs of a sustained market recovery. That would see the S&P 500 break above its 200-day mark and then all major indexes clear their December 1 highs. Even in this positive scenario, investors should add exposure cautiously.
Read The Big Picture every day to stay in tune with market direction and leading stocks and sectors.
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