Dow Jones futures edged higher Monday morning, while S&P 500 futures and Nasdaq futures rose modestly. The stock market rally had a down week after big gains over the prior five weeks. But the pullback has been normal so far.
Will the uptrend rev higher, continue to pause, or sell off more seriously? Three big factors to watch this week: the CPI inflation report, earnings and Tesla.
The CPI inflation report is on Tuesday morning, helping to set Fed rate hike expectations.
Key earnings this week include Arista Networks, Cadence Design Systems and Airbnb, all near buy points. Early Monday, Check Point Software and Monday.com rallied on earnings, near potential entries.
Tesla stock has doubled in just over a month, with TSLA investors betting on rosy scenario without a lot of information to confirm or deny that. We'll start to see how many thorns are in that scenario this coming week, with China EV registration data for Tesla and key rivals.
Meanwhile, Apple has forged a new handle buy point while Exxon Mobil is back in a buy zone.
The video embedded in this article reviewed the market rally's pullback in depth, while also analyzing XOM stock, Dexcom and Aehr Test Systems.
Dow Jones Futures Today
Dow Jones futures climbed 0.2% vs. fair value. S&P 500 futures advanced 0.3%. Nasdaq 100 futures climbed 0.6%.
Crude oil futures edged lower. Copper prices tilted higher.
U.S. fighter jets shot down two more high-altitude objects over the weekend, one over Canada and one over Lake Huron. That's a total of four objects shot down recently in North America, starting with an alleged China spy balloon off the South Carolina coast on Feb. 4. It's unclear what impact this stepped-up activity will have on U.S.-China relations or Chinese stocks.
Hong Kong's Hang Seng edged down 0.1% Monday, well off intraday lows, despite U.S. weakness Friday.
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 gave up ground last week, especially small caps and growth plays.
The Dow Jones Industrial Average edged down 0.2% in last week's stock market trading. The S&P 500 index fell 1.1%. The Nasdaq composite lost 2.4%. The small-cap Russell 2000 shed 3.4%.
The 10-year Treasury yield surged 21 basis points to 3.74%.
U.S. crude oil futures jumped 8.6% to $79.72 a barrel last week, rebounding from the prior week's steep losses. Gasoline futures leapt 7.9%. Even natural gas prices bounced 4.3%.
ETFs
Among growth ETFs, the Innovator IBD 50 ETF sank 1.7% last week, while the Innovator IBD Breakout Opportunities ETF declined 2.15%. The iShares Expanded Tech-Software Sector ETF retreated 1.5%. The VanEck Vectors Semiconductor ETF lost 2%.
SPDR S&P Metals & Mining ETF slumped 4.6% last week. The Global X U.S. Infrastructure Development ETF sank 2.3%. U.S. Global Jets ETF skidded 5.3%. SPDR S&P Homebuilders ETF fell 3.5%. The Energy Select SPDR ETF leapt 5%, with XOM stock a major component. The Financial Select SPDR ETF dipped 0.3%. The Health Care Select Sector SPDR Fund edged down 0.15%, though it was the seventh straight weekly decline.
Reflecting more-speculative story stocks, ARK Innovation ETF tumbled 8.6% last week and ARK Genomics ETF slumped 8.65%, following major gains in recent weeks. TSLA stock is a major holding across Ark Invest's ETFs.
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CPI Inflation Report
The CPI inflation report for January is due Tuesday morning. Economists expect to see inflation continuing to trend lower, but still far too high for the Fed's liking.
On Friday, the Labor Department revised up November and December CPI data slightly. The December consumer price index rose 0.1% from the prior month vs. the initial --0.1% reading. Core CPI, which excludes food and energy, increased 0.4%, revised from 0.3%. The November CPI and core CPI were revised up by a 0.1 percentage point.
The CPI inflation report headlines a busy week for economic data, including January retail sales, the February Philly Fed manufacturing index, weekly jobless claims and more. The data will reinforce or undercut market rally's "soft landing" thesis.
Currently, markets overwhelmingly expect quarter-point rate hikes in March and May. Meanwhile, the odds of another move in June have risen to 43%.
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Earnings
Check Point Software modestly beat EPS views early Monday and announced a $2 billion stock buyback. Monday.com crushed views with a surprise adjusted profit. CHKP stock rose slightly before the open while MNDY stock jumped, with both software makers near potential buy points.
Arista Networks, Avis Budget, Medpace, SolarEdge Technologies, Palantir and Cadence Design Systems are all on tap Monday night. CDNS rival Synopsys is due Tuesday, along with Airbnb, Marriott International and Global Foundries. Most of these names, with the possible exception of PLTR stock, are near potential buy points.
Shopify, Applied Materials, Crocs and Visteon are later in the week.
Earnings season is off its fever pitch, but hundreds of companies will report this coming week. The megacaps have reported, but earnings are still key for many sectors and of course individual stocks. Expedia earnings Thursday night hit travel stocks broadly Friday, including ABNB stock and Marriott.
Tesla Demand
Tesla stock slumped 5% to 196.89 on Friday, ending an eight-session win streak. Shares still rose 3.6% for the week, approaching the 200-day line. TSLA stock has spiked 93% from the Jan. 6 bear-market low of 101.81. Jan. 6 was the follow-through day for the current market rally.
Jan. 6 also was the day that Tesla announced major price cuts in China and key Asian markets, after significant China price cuts in late October. Tesla followed up with big reductions in Europe and the U.S., with the latter also making more Model 3 and Model Y vehicles eligible for big tax credits of up to $7,500.
The price cuts are taking a toll on Tesla's prized gross margins, which already off their peak. But they've also given a big boost to Tesla demand. Tesla stock has skyrocketed in part on hopes — fanned by CEO Elon Musk — that the Tesla price cuts will buoy demand through the year.
The risk is that demand wanes after the initial burst, especially in China. Unlike the U.S., China has a highly competitive EV market. Many other EV makers have cut prices or offered big discounts in the wake of Tesla's Jan. 6 move. More moves are sure to come. Meanwhile, rivals keep launching new or revamped EVs.
On Tuesday, investors will get China EV registration data for the week ended Feb. 12. It's the first real data without Lunar New Year holiday impacts on production and sales. Most EV makers should see a big increase in registrations.
Tesla sales, unfortunately, may be tricky to interpret. Strong registrations will suggest robust ongoing demand, but they could represent filling orders from prior weeks, with few new sales. Weak registrations may reflect Tesla Shanghai exporting much of its latest production.
So while Tuesday's data will be important, it may be a few weeks before investors get a clear picture of Tesla's ongoing demand.
Sunday night, Tesla raised the U.S. Model Y Performance price by $500, a week after raising Model Y Long Range and Performance prices by $1,500 and $1,000, respectively. Tesla also cut the base Model 3 price by $500 for the second time in a week.
An ad urging regulators shut down Tesla's Full Self-Driving software aired during Sunday's Super Bowl.
TSLA stock edged lower early Monday.
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Apple Stock
Apple stock fell 2.3% to 151.01 in the latest week, following four straight weekly gains from bear-market lows. That now gives AAPL stock a handle on a base going back to August, with a 157.48 buy point. The tech titan is not a market leader, with its relative strength line still well off its September peak. Still, as the world's only $2 trillion stock and a member of the Dow Jones, S&P 500 and Nasdaq composite, Apple stock's performance matters.
Exxon Stock
Buoyed by rebounding crude prices, XOM stock jumped 6.5% to 119.20 last week, moving back above a 114.76 flat-base buy point, according to MarketSmith analysis. Many energy stocks sold off hard in the prior week with oil prices tumbling, but XOM stock gave ground grudgingly. Shares found support at the 10-week line on Monday and then bounced.
Market Rally Analysis
The stock market rally is in the midst of its first real pullback since the Jan. 6 follow-through day. So far the retreat has been modest and healthy.
The Nasdaq, S&P 500 and Russell 2000 all lost ground but found support around their 21-day moving averages on Friday. The S&P and Russell also are trading to hold their late 2022 highs. The Dow Jones, which has tested its 50-day line repeatedly in the past two weeks, rebounded from that key level Friday.
While Friday was mixed for the major indexes, it didn't feel that way for growth names.
Still, the retreat is letting the market digest powerful gains, with the moving averages catching up somewhat. Leading stocks are forging handles or finding support at bullish levels, though a few are powering higher or moving into position.
Of course, constructive action by the major indexes and leading stocks can quickly turn deconstructive. If they fall significantly from here, it would start to be worrisome.
Treasury yields and the dollar have rebounded strongly in the past two weeks, putting pressure on stocks. It's no coincidence that the market rally peaked on Feb. 2, when the 10-year Treasury yield hit a five-month intraday low of 3.33%. The dollar hit a recent bottom on Feb. 1.
So the CPI inflation report and other economic data will be important. So will the still-heavy flood of earnings from ANET, Shopify, Airbnb, Cadence Design and more. EV stocks and speculative growth may take their cue from Tesla.
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What To Do Now
Until the market rally shows real strength, investors should be careful about adding exposure. The recent pullback highlights the importance of adding exposure gradually, and not buying extended.
Still, investors should be ready if the market rally regains real momentum. Run your screens this weekend and prepare your game plan for the coming week.
That game plan isn't all about offense. Be ready to take defensive action if conditions deteriorate for the broader market or specific holdings.
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.
