Dow Jones futures fell solidly Monday morning, along with S&P 500 futures and Nasdaq futures, with the Federal Reserve meeting in focus. The 10-year Treasury yield rose to an 11-year high.
The stock market suffered damaging losses in the past week on a surprisingly hot CPI inflation report as well as some grim earnings reports or warnings. The major indexes gapped below their 50-day moving averages and undercut some further key levels on Friday, with their June lows no longer far away. Many leading stocks also struggled.
It's a time for investors to have minimal exposure, at most. Build up watchlists with stocks boasting strong relative strength and holding key levels. Tesla, Enphase Energy, Celsius Holdings, Wolfspeed and Vertex Pharmaceuticals all qualify.
Of course, Tesla stock, Enphase, etc. look robust now, but they may not in the coming days. Plenty of stocks looked strong until last Tuesday. Others looked solid until Thursday or Friday.
WOLF stock is on the IBD Leaderboard watchlist. Tesla, Enphase and CELH stock are on the IBD 50. ENPH stock and Vertex are on the IBD Big Cap 20.
In other news, AutoZone rallied after reporting better-than-expected fiscal fourth-quarter results before the open. AZO stock, which is technically in a buy zone from a June breakout, is set to move above its 50-day line at the open.
Fed Meeting
The Fed meeting is on Sept. 20-21. In the wake of Tuesday's consumer price index, which showed strength everywhere outside gasoline, markets reinforced expectations of a third straight Fed rate hike of 75 basis points. (There is a slim chance of a monster 100-basis-point move.) Investors will be focused about what Fed policy hints for the future.
Fed quarterly projections will signal where policymakers see the fed funds rate further out.
Right now, the market is leaning toward yet another 75-basis-point rate hike in November, followed by 25 or 50 basis points in December. That would push the fed funds target rate to either 4%-4.25% or 4.25%-4.5%, vs. expectations of 3.75%-4% before the CPI report.
Fed chief Jerome Powell will give his post-meeting comments at 2:30 p.m. ET. Powell made it crystal clear in his Aug. 26 Jackson Hole speech that the Federal Reserve would not repeat its mistakes of the 1970s by easing policy too quickly.
Dow Jones Futures Today
Dow Jones futures fell 0.8% vs. fair value. S&P 500 futures lost 0.9% and Nasdaq 100 futures declined 1.%.
The 10-year Treasury yield rose 6 basis points to 3.51%, which would top the 11-year high of 3.48% set on June 14.
Crude oil prices retreated more than 2%. U.S. natural gas futures fell more than 3%.
Bitcoin plunged below $19,000.
China's Chengdu said its Covid lockdown will end in an "orderly manner," with public transportation and normal work resuming Monday, but still with significant restrictions. The southwestern city of more than 21 million people shut down on Sept. 1, adding to China's economic woes. Chengdu's could boost optimism about the Chinese economy, but the "zero-Covid" policy means serious restrictions are a constant threat anywhere in the country.
On "60 Minutes," President Joe Biden said the U.S. would defend Taiwan if China attacked, though the White House later said U.S. policy has not changed.
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 Last Week
The stock market suffered sharp losses in the past week, reversing hard after solid gains on Monday.
The Dow Jones Industrial Average tumbled 4.1% in last week's stock market trading. The S&P 500 index sank 4.8%. The Nasdaq composite tumbled 5.5%. The small-cap Russell 2000 gave up 4.5%.
The 10-year Treasury yield ran up 13 basis points to 3.45%, the seventh straight weekly gain.
U.S. crude oil futures fell 1.9% to $85.11 a barrel last week, third straight weekly decline. Natural gas prices sank 2.7%, but after a wild week of gains and losses.
ETFs
Among the best ETFs, the Innovator IBD 50 ETF skidded 5% last week, while the Innovator IBD Breakout Opportunities ETF gave up 4.2%. The iShares Expanded Tech-Software Sector ETF plunged 8.3%. The VanEck Vectors Semiconductor ETF gave up 6%.
SPDR S&P Metals & Mining ETF dived 10.3% last week. The Global X U.S. Infrastructure Development ETF 7.5%. U.S. Global Jets ETF slid 5%. SPDR S&P Homebuilders ETF tumbled 6.9%. The Energy Select SPDR ETF gave up 2.7% and the Financial Select SPDR ETF lost 3.9%. The Health Care Select Sector SPDR Fund declined 2.3%
Reflecting more-speculative story stocks, ARK Innovation ETF fell 4.5% last week and ARK Genomics ETF 5.3%. Tesla stock is a major holding across Ark Invest's ETFs.
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ENPH Stock
Enphase stock rose 4% this past week to 318.01, continuing to find support at a rising 21-day line. A pullback to the 21-day, perhaps pausing for the 50-day line to catch up, might offer a safer buying opportunity. A number of solar plays still look strong.
Celsius Stock
CELH stock fell 4.9% to 100.70 last week, but found support at the 10-week moving average A move above Thursday's high of 108.37 could offer an aggressive entry. In a few weeks, Celsius stock could have a new base with a 118.29 buy point.
WOLF Stock
EV-focused chipmaker Wolfspeed rallied 5.25% to 120.21 last week, including Friday's 2.8% gain. Investors could treat 123.35 as a buy point for WOLF stock from a handle in a longer consolidation.
VRTX Stock
Vertex stock fell 0.9% last week to 289.42, but rose 0.8% on Friday to push above the 21-day, 50-day and 10-week lines. A move above the Sept. 12 high of 296.14 would offer an early entry. It's possible VRTX stock will have a flat base in a few days, with a 306.05 buy point.
Tesla Stock
Tesla stock rose 1.2% to 303.35 this past week, after soaring 10.9% in the prior week. Shares of the EV giant held support at the 200-day moving average.
The relative strength line for TSLA stock has improved considerably. over the past two weeks, hitting a five-month high. The RS line, the blue line in the chart provided, tracks a stock's performance vs. the S&P 500 index.
Investors could use a move above Thursday's high of 309.12 as an aggressive entry, or the short-term high of 314.64. That would still be a long way from a traditional buy point.
For all of these stocks, the weak market conditions raise the risks of any purchases now.
In China and Europe, Tesla has enacted de facto price cuts as production capacity expands and wait times fall. On Monday, Piper Sandler gave a positive spin, saying price cuts could get Tesla grab market share.
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Stock Market Analysis
The stock market started the past week with a strong gain on Monday, which now seems a long time ago. The major indexes plunged through their 50-day moving averages on Tuesday. On Friday, the Nasdaq and S&P 500 closed below their Sept. lows and late July lows, even if they did come off intraday lows.
The major indexes have now retraced more than half their gains from the mid-June to mid-August advance. Those June lows are no longer so far away.
Yes, some leading stocks held up, but for every Tesla, Vertex or Celsius, there were several quality names that suffered damaging losses.
Tuesday's CPI report didn't just cause serious technical damage to the market, it undermined the broader bull case. Investors had been betting that a tame inflation report would spur the Fed to start slowing rate hikes, at least after September. Those hopes have been pushed back.
It's the second time that markets have been too rosy about Fed policy. The summer rally was spurred in no small part by investors expecting the Fed to soon end rate hikes — and then start cutting sometime in 2023. Powell's Jackson Hole speech ended talk of a "Fed pivot" to rate cutting.
It's possible that the actual Fed meeting Wednesday will not be a big market mover, given how much investors have adjusted in the past three weeks.
Rates are going to go high, and stay there for an extended period. The Fed is willing to have the U.S. fall into recession in order to wring out inflation.
Outside of falling jobless claims, which only reinforced Fed concerns, recent economic data has been disappointing. A high-inflation, high-wage, low-growth environment is a huge challenge for any company.
The disastrous FedEx earnings and commentary, mixed results from Adobe and warnings from Nucor and U.S. Steel reflect that companies face an extended period of uneven or weak results. The multinationals and exporters that dominate the S&P 500 may be especially exposed, given the strong dollar along with weakness in Europe and China.
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What To Do Now
The stock market is not in good shape. Macroeconomic conditions are poor. Investors have to consider that the market could undercut June's lows or be rangebound for weeks or even months until there's real clarity on the endgame for Fed rate hikes.
Investors' exposure should be minimal. There's nothing wrong with being 100% cash, especially if recent trades have gone against you.
Focus on building your watchlists, paying attention to stocks showing resilience. If the market remains weak, some of these names will falter, while others will crop up. The key is to have an up-to-date list when market conditions do improve, and you're ready to take advantage.
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.
