Fed, Megacaps, Cloud Stocks Distort Rally;  What to do

Dow Jones futures will open Sunday evening, along with S&P 500 futures and Nasdaq futures. Even with a solid close on Friday, the stock market’s rally suffered significant damage last week, with major indexes falling on hawkish comments from Fed chief Jerome Powell.




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The Nasdaq had its worst week since January as megacaps tumbled and cloud software tanked.

An apple (AAPL), Amazon.com (AMZN) and Google Parent Alphabet (GOOGLE) all lost more than 10% for the week, with parent Facebook Meta platforms (META), Tesla shares and Microsoft shares are not far behind. google stock, meta, Amazon.com (AMZN) and Microsoft (MSFT) all bottomed out in the bear market. Apple stock and Tesla (TSLA) no, but they are close.

Meanwhile, Twilio (TWLO) and Atlassian (TEAM) tumbled on Friday amid disappointing results and guidance, losing more than 40% for the week. Numerous other software names have collapsed, with or without profits.

A market rally trying to fight the Federal Reserve with the big tech sector collapsing? This is a difficult task. So while there are some stocks and sectors showing strength, investors should be extremely cautious in the current environment.

Dow Jones futures today

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

Remember this night action in Dow futures and elsewhere does not necessarily become an actual trade in the next regular Stock Exchange session.


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Stock market rallies

The stock market rally started the week on a decent note, but then sold off on Wednesday afternoon on hawkish comments from Fed chief Jerome Powell. The major indexes gave up even more on Thursday. Stocks rose sharply on Friday after a mixed jobs report, but ended up closing solidly higher on the day.

The Dow Jones Industrial Average was still down 1.4% last week Exchange Trading. The S&P 500 index fell 3.3%. The Nasdaq composite fell 5.7 percent, its worst loss since the week ended Jan. 21. The small-cap Russell 2000 fell 2.4%.

The yield on the 10-year Treasury note jumped 15 basis points to 4.16%. The 10-year yield resumed its advance after snapping a 12-week winning streak and briefly returned to around 4%.

The dollar was up 0.2% for the week but fell 1.9% on Friday, its biggest one-day drop in years. This likely contributed to the stock market rally on Friday.

Markets now see a 61.5% chance of a 50 basis point hike at the Fed’s December meeting. The consumer price index for October is expected on Thursday. The November jobs and CPI reports will be released ahead of the Fed’s rate hike decision on December 14.

U.S. crude futures jumped 5.4 percent last week to $92.61 a barrel. Natural gas rose in price by nearly 13%.

A technical wreck

Shares of Apple, which rose to its 200-day line in the previous week, tumbled 11.15% to 138.38 this past week. Shares of AAPL have come within a penny of their October lows, though they still have some distance from June’s bear market lows. Microsoft fell 6.1%, Google 10.1%, Amazon 12% and META shares 8.5%, all to multi-year lows. Tesla shares fell 9.2% for the week, nearing their low for the day since Oct. 24 on Friday. That’s after starting the week strong, hitting 237.40 intraday on Tuesday.

Meanwhile, dark days are coming for cloud software. Here are just a few examples: Atlassian shares fell 29% on Friday and 38% for the week. Twilio shares tumbled nearly 35% on Friday and 43.5% for the week. Snowflake (SNOW), which won’t report for several weeks, was down 17% for the week.

Meanwhile, Fortinet (FTNT) tumbled 17.5% for the week as weak billings guidance offset strong earnings and a bullish revenue outlook. Paycom (PAYC) fell 10.3% despite solid results and guidance.

Businesses looking to cut costs can curb software spending as they set budgets for 2023.

ETFs

Avg the best ETFsInnovator IBD 50 ETF (FFTY) fell 1.2% last week, while the Innovator IBD Breakout Opportunities ETF (BOOTH) lost 2%. iShares Expanded Tech-Software Sector ETF (IGV) fell 10.2%, with MSFT shares a key holding. VanEck Vectors Semiconductor ETF (SMH) fell just 0.7% after jumping 4.65% on Friday, closing high in the weekly range.

SPDR S&P Metals & Mining ETF (XME) rose 2% last week. Global X US Infrastructure Development ETF (PAVING) decreased by 0.1%. US Global Jets ETF (STREAMS) rose by 0.3%. SPDR S&P Homebuilders ETF (XHB) fell by 5%. Energy Select SPDR ETF (XLE) rose 2.4%, just below an eight-year high. The Financial Select SPDR ETF (XLF) fell by 0.9%. Select Healthcare Sector SPDR Fund (XLV) gave up 1.5%.

Reflecting the more speculative stocks of history, the ARK Innovation ETF (ARKK) tumbled 9.4% last week, and the ARK Genomics ETF (ARKG) declined by 4.65%. Tesla stock is a major holding in Ark Invest’s ETF.


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Market Rally Analysis

The stock market rally had a bad week with a dour Fed and often weak earnings weighing on major indexes. The Dow Jones, which led the market’s uptrend, had the weakest decline, but returned below its 200-day moving average. The Russell 2000 hit resistance near the 200-day line, but recovered on Friday to close above the 50-day line. The S&P 500 broke through the 50-day period.

The Nasdaq Composite, which never reached its 50-day moving average, fell the most, closing below the bottom of its following day on Wednesday, a bearish signal.

The major indexes extended their losses on Thursday before collapsing on Friday with a mixed jobs report.

The negative market action and large reversals in many stocks caused a shift to a “market under pressure”.

The big market mover was Fed boss Powell, who pulled the rug out from the market’s rally by signaling a move to smaller hikes but a higher top fed funds rate.

Meanwhile, tech megacaps including Apple, Tesla and Amazon suffered huge losses. Cloud software names like Atlassian and Twilio have melted away, with recent earnings and guidance being important factors.

Chips haven’t had a terrible week, relatively speaking, but only a few names are trading near highs.


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There are several sustainable market areas. The healthcare sector looks strong overall. Energy names, including a broad range of oil stocks, liquefied natural gas companies and coal mines, plus a few solar stocks, are doing well.

Lithium and some steel games do well. Infrastructure firms in the energy, utilities and telecommunications industries are a bright spot. Network businesses in general are a rare technology field that is leading the way. Some restaurants and discount retailers are showing strength. Various financial companies, especially brokers and brokerages, made big profits.

Still, it’s hard to see a strong rally in the market with so many huge tech sectors reeling. It will be hard enough for the major indexes to advance with Apple, Google, Tesla and cloud software names lagging behind. But trying to progress with those areas going down or crashing?

If the inflation reports show a clear and meaningful decline, spurring a reduction in Fed rate hikes, then perhaps megacaps and cloud software could bottom out. However, a return to technological leadership may be a long way off. On the other hand, if the October CPI report on November 10 shows that inflation is still hot, tech stocks could drag down leading sectors to complete the market’s rally.

Tuesday is election day. The stock market tends to do better with divided government, and Republicans are poised to take back control of the House and perhaps the Senate. But political forecasters have been predicting at least a GOP victory all year, so it’s unclear whether Tuesday’s actual results will be much of a catalyst.


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What should we do now

The stock market rally is under pressure. The Fed is going from fast and furious to slow and long, but it’s still hawkish. The tech sector is a train wreck. The major indexes broke some key levels. Indices and leading stocks are subject to large intraday and intraday fluctuations.

This is not a good environment to buy stocks. Investors should seek to reduce exposure, either explicitly or simply by reducing losses on various positions.

If the market’s rally shows renewed strength, with the S&P 500 and possibly the Nasdaq moving above their 50-day moving averages, investors may start adding exposure. But that will likely require technology to stabilize and inflation data to show some cooling.

If conditions improve, you’ll want to be ready. A number of stocks are in the making, with many more not too far away. So make your watch lists, be patient and stay engaged.

Read it The big picture every day to stay in sync with 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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