Dow Jones Futures: Inflation Report, Federal Reserve Are Big Tests For Market Rally

Dow Jones futures will open Sunday evening, along with S&P 500 futures and Nasdaq futures, with close attention to the CPI inflation report and the Federal Reserve.




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The stock market rally reversed last week with the major indexes continuing their trend of reaching new highs but then retreating. It’s a challenging environment to buy stocks.

Investors are getting a one-two punch of macroeconomic news this coming week. On Tuesday, the Labor Department will release the November CPI inflation report. On Wednesday afternoon, the Federal Reserve will raise rates again with Fed Chairman Jerome Powell signaling further tightening as early as 2023.

This can be the catalyst for big market gains or losses, or the sideways action continues. Investors should wait for the inflation report and Fed news before adding exposure.

Breakout failures or fizzles abound, with DXCM stock falling back on Friday after briefly clearing a buy point on Thursday on FDA approval.

But here are five stocks to watch: The Dow Jones giants Caterpillar (CAT) and Goldman Sachs (GS) Sanminah (SANM) McKesson (MCK) and MercadoLibre (MELI). To be clear, none of these stocks are actionable, with MELI stock in particular requiring some work.

Microsoft (MSFT) is doing relatively well for megacaps, though Appl ( AAPL ) below its 50-day line and Tesla (TSLA) is trying to avoid setting new bear market lows. But MSFT stock remains well below its 200-day line and hasn’t made much progress over the past month.

The video embedded in the article reviewed and analyzed the market action in depth Dexcom (DXCM), MercadoLibre and CAT stock.


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CPI inflation and the Fed meeting

Beginning Tuesday, the Labor Department will release November’s consumer price index. Both headline CPI and core inflation rates should cool over the next few months, if only because comparisons become harder. But the service prices are very strong.

The Federal Reserve wants to see a significant decline in services inflation, as well as wage gains, before it stops raising rates. At 2 p.m. ET, the Fed is expected to raise its fed funds rate by 50 basis points, to 4.25%-4.5%, ending a streak of four 75-basis-point hikes. Investors will be looking for some clues about the February meeting, and how high the fund’s rate could ultimately end. Markets are currently pricing in another half-point Fed rate hike in February, although a quarter-point move remains a good chance.

Fed Chairman Paul’s remarks at 2:30 PM ET, along with the CPI inflation report, may set the Fed policy headline heading into 2023.

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Paul and many policymakers have indicated that a recession may be necessary to bring inflation under control.

Dow Jones futures today

Dow Jones futures open at 6pm ET on Sunday, along with S&P 500 futures and Nasdaq 100 futures.

Note that overnight action in Dow futures and elsewhere does not translate into actual trading in the next regular stock market session.


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Stock market rally

The stock market rally has seen significant pullbacks for key indices over the past week.

The Dow Jones Industrial Average sank 2.8% in last week’s stock market trade. The S&P 500 index lost 3.4%. The Nasdaq composite fell 4%. The small-cap Russell 2000 fell 5.1%.

The 10-year Treasury yield rose 6 basis points to 3.57%, rebounding from the week’s average of 3.4%.

US crude oil futures fell 11% to $71.02 a barrel last week, while gasoline futures fell 9.8%. Both hit 2022 lows. Natural gas prices fell by 0.6 percent.

ETFs

Among key growth ETFs, the iShares Expanded Tech-Software Sector ETF ( IGV ) fell 4.6%, with a large holding of Microsoft stock. The VanEck Vectors Semiconductor ETF ( SMH ) retreated 1.7%.

Reflecting the more speculative stock stocks, the ARK Innovation ETF ( ARKK ) fell 9.2% last week and the ARK Genomics ETF ( ARKG ) 8.1%. TSLA stock is a broad holding across Ark Invest’s ETFs.

The SPDR S&P Metals and Mining ETF ( XME ) yielded 6.4% last week. The Global X US Infrastructure Development ETF (PAVE) returned 2.85%. The US Global Jets ETF ( JETS ) fell 3.3%. The SPDR S&P Homebuilders ETF ( XHB ) fell 2%. The Energy Select SPDR ETF (XLE) sank 8.45%, decisively breaking the 50-day line. The Financial Select SPDR ETF ( XLF ) retreated 3.9%. The health care select sector SPDR fund ( XLV ) fell 1.3% after rising in eight of the past nine weeks.


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Megacap stock

Apple stock has fallen 3.8% in the past week, falling below its key level on Tuesday and hitting resistance on Friday. The bad news about iPhone production may be in the price, and AAPL stock is pulling back.

Fellow Dow tech titan Microsoft stock also sank 3.8%, but held support at a 21-day line, modestly above its 50-day high. But it is well below the 200-day line. MSFT stock is essentially flat from a month ago, as are the S&P 500 and Nasdaq.

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Tesla stock fell 8.1% in the last week, even with Friday’s 3.2% pop. TSLA stock is rallying above recent bear market lows. Tesla announced new Chinese incentives last week with widespread media reports that the Shanghai factory will significantly reduce production over the next few weeks, even stopping production of the Model Y.


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Stock to view

Caterpillar stock fell 3.7% last week to 227.29, cutting a 21-day line. A retreat can end up being a constructive shock. CAT stock has a buy point at 238 or 239.95 from a long cup base. Next week, the Dow heavy equipment giant could have a flat base with its 239.95 buy point. A slightly longer break will allow the 50-day bullish to close the gap with CAT stock.

Goldman stock fell 5.6% to 359.14 in the last week, tripping a breakout round from the cup base with a 358.72 buy point, before rallying slightly higher. A strong bounce from here could suggest a new entry, especially if the 50-day or 10-week line is reached. On the weekly chart, GS stock has a bearish base with a 13-month cup, with a buy point of 389.68, according to MarketSmith analysis. Last week has now created more depth in this handle, which may also become a flat base in a week.

Sanmina stock fell 7.3% this week to 62.48. SANM stock had solidified strongly in the take-profit zone after the October breakout from the cup base. Shares may be starting to pull back toward the 50-day/10-week line, offering a buying opportunity, although the weekly decline was unexpected. SANM stock is also operating on a possibly flat base.

McKesson stock fell 4% last week to 371.37, falling just below the 50-day and 10-week lines on Friday. MCK stock is working on a new consolidation after a sharp sell-off on Nov. 10-11 that pushed many defensive medical stocks. A move above the December 2 high of 389.45 could suggest an early entry, still close to the moving average.

MELI stock sank 5.1% to 896.48, its fourth straight weekly decline. The Latin American e-commerce and payments giant has a buy point of 1,095.44, with a trendline entry around 1,025. An aggressive entry could be decisive for MELI stock’s moving average recovery, with the December 2 high of 957 as its trigger. While MercadoLibre stock is trending lower, the weekly losses come in light volume with some relatively strong positive closings.

Market rally analysis

A week ago, the stock market rally saw the S&P 500 hit new highs, above its 200-day line for the first time in months. But as investors reassessed the jobs report and Fed Chairman Paul’s comments, major indexes retreated.

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The S&P 500 fell below its 200-day line, while the Nasdaq tested its 50-day. Both resisted the 21-day line later in the week. The Russell 2000 broke below its 200-day and 21-day lines and fell right to its 50-day, just shy of the 10-week line.

Leading the rally, the Dow has support around its 21-day mark.

The S&P 500 is basically where it’s been since Nov. 10, when the October CPI inflation report boosted stocks. The Nasdaq and Russell 2000 returned to those levels in early November, but also in late October.

If you had to design a scenario to encourage investors to continue falling, this current high might be the blueprint: a market with several large one-day gains followed by a reversal in several sessions.

This is still a market-confirmed rally. However, further losses, such as the Nasdaq or especially the S&P 500 clearly breaking their 50-day line, would be worrisome.

Tuesday’s November CPI inflation report and Wednesday’s Fed meeting announcement and Paul’s comments could provide the catalyst for a sustained market rally, or a decisive sell-off. But they can also create another big market pop that looks decisive, only to be followed by another pullback.


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what to do now

Investors should be wary of adding exposure until the CPI inflation report and Fed meeting are in the review picture. Even as markets rumble on inflation data and Fed Chairman Paul’s comments, investors should be optimistic about new purchases, in case the major indexes simply pull back over the next few sessions.

At some point a sustained, steady market rally will take hold. When this happens, buying opportunities will abound.

So get your stock market holiday shopping list ready. Many stocks from different sectors are adjusting or are close to doing so.

Read the big picture daily to stay in tune with market direction and leading stocks and sectors.

Please follow Ed Carson on Twitter @IBD_ECarson For stock market updates and more.

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