Futures: Why rally has room to run after tame CPI

Dow Jones futures rose slightly overnight, along with S&P 500 futures and Nasdaq futures.




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The stock market rallied higher on Thursday after a cooler than expected CPI inflation report, with the Dow Jones up 1,198 points. Core and core price gains were lower than expected, supporting arguments for a slower rate hike by the Fed. Treasury yields and the dollar collapsed.

If inflation continues to ease, the Federal Reserve may choose to end interest rate hikes earlier than Fed chief Jerome Powell suggested last week.

Many of the big moves were in failed stocks. An apple (AAPL), Microsoft (MSFT), Google Parent Alphabet (GOOGLE), Facebook parent Meta platforms (META), Amazon.com (AMZN) and Tesla (TSLA) were all big winners on Thursday, but MSFT shares were the only ones to move above the 50-day line. Nvidia (NVDA), which has a higher market cap than META stock at the moment, has rallied sharply after already reclaiming the 50-day line, but it still needs a lot of work.

Many struggling cloud software stocks boasted double-digit gains on Thursday. Digital Turbine (APPLICATIONS) broke out with a 61% post-earnings gain, but that’s not even a two-month high.

Still, investors should definitely consider adding more exposure and looking to stock creation.

However, there were not many active stocks on Thursday. But GlobalFoundries (GFS), Enphase Energy (ENPH), white-headed (GFF), Builders FirstSource (BLDR) and General Motors (GM) were all flashing different buy signals.

GM stock was added SwingTrader and it was on Thursday IBD Stock of the Day. ENPH shares are at IBD Ranking Watch List and is on IBD 50 list.

Dow Jones futures today

Dow Jones futures were up 0.2% at fair value. S&P 500 futures advanced 0.2% and Nasdaq 100 futures rose 0.25%.

The 10-year Treasury yield fell 2 basis points to 3.81%.

Beijing reported its most Covid cases in more than a year as rising infections across the country spur new lockdowns. China’s new leaders have called for more targeted, “resolute” restrictions to control the spread.

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 got off to a strong start and stayed that way throughout Thursday, closing at session highs.

Dow futures jumped ahead of the open on the surprisingly modest CPI inflation report. Consumer prices rose 0.4% in October, or 0.3% excluding food and energy. The CPI inflation rate fell to 7.7%, the lowest level since January. Core inflation edged back to 6.3% on views to remain at a 40-year high of 6.6%.

The bulls cheered and sighed after finally getting a positive reading on inflation.

The Dow Jones Industrial Average jumped 3.7% on Thursday Exchange Trading. The S&P 500 index 5.5%. The Nasdaq Composite was up 7.35%. The small-cap Russell 2000 jumped 6.1%.

The yield on the 10-year Treasury note fell 32 basis points to 3.83%, the lowest in a month. The dollar suffered its biggest drop in several years, continuing its sharp losses over the past week.

Markets now see an 81% chance of a 50 basis point Fed rate hike in December. Ahead of the CPI inflation report, there was still a solid chance of a fifth consecutive 75 basis point increase. It should be noted that there is now a 50-50 chance of a Fed rate hike of just a quarter point in February.

Bitcoin rebounded to around $17,500 on Thursday night after crashing to a two-year low below $16,000 on Wednesday afternoon.

U.S. crude oil prices rose 0.6% to $86.47 a barrel. Natural gas rose in price by 6.4%.

Megacap Shares

Apple shares jumped 8.9%, rebounding from their worst close in nearly four months. META shares jumped 10.25%, continuing a mini-move of bear market lows amid major job cuts and other costs. Amazon shares jumped 12.2% from a 30-month low on Wednesday after the e-commerce giant announced a cost-cutting review.

Microsoft shares jumped 8.2%, surpassing its 50-day high. Google shares jumped 7.6%, but remain well below the 50-day line.

Tesla shares jumped 7.4%, but it was still an insider’s day after falling to a two-year low on Wednesday.

Shares of Nvidia jumped 14.3%, continuing a rally that began on October 13. Nvidia’s earnings are due to be released on November 16.

ETFs

Avg the best ETFsInnovator IBD 50 ETF (FFTY) gained 3.1%. iShares Expanded Tech-Software Sector ETF (IGV) jumped 9.1%, with MSFT shares a major component. VanEck Vectors Semiconductor ETF (SMH) screamed 10.2% higher. NVDA stock is a big holding.

SPDR S&P Metals & Mining ETF (XME) jumped 5.5%, and the Global X US Infrastructure Development ETF (PAVING) 5.65%. US Global Jets ETF (STREAMS) rose 4.9%. SPDR S&P Homebuilders ETF (XHB) raised the roof with a 10.3% gain. Energy Select SPDR ETF (XLE) rose 2.2%, and the Financial Select SPDR ETF (XLF) advanced by just over 5%. Select Healthcare Sector SPDR Fund (XLV) rose 2.5%.

Reflecting the more speculative stocks of history, the ARK Innovation ETF (ARKK) with a 14.5% higher fee and the ARK Genomics ETF (ARKG) 11.1%. Tesla stock is a major holding in Ark Invest’s ETF.


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Market Rally Analysis

The stock market rally had a huge boost on the CPI inflation report. The S&P 500 and Russell 2000 rose above their 50-day moving averages, with the former clearing recent highs and the latter just above its 200-day moving average. The Dow Jones, which has been leading this uptrend, jumped from its 200-day line to its best levels since its August highs.

The Nasdaq, the clear laggard in the market’s rally thus far, jumped to break above its 50-day line. Amazon and many failed megacaps and cloud stocks led the way, while Nvidia and other chips continued their recent rally, but mostly below buy zones.

Thursday’s action is a follow-up following day on all major indexes, with big gains in NYSE and Nasdaq volume. This gives more confidence in the stock market rally.

The CPI inflation report was just one data point, but it was what the Fed wanted and needed to see. It should be noted that it will be several weeks before the next wave of Fed-critical reports comes out. This suggests a favorable backdrop for the market rally, at least during this period.

A positive follow-up would be for the Nasdaq to move decisively above the 50-day line, clearing its October highs just above 11,200. Pushing the S&P 500 above the 200-day would be a very strong signal.


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Leading stocks

There weren’t many top stocks in position on Thursday. Some strong names look extended, while Thursday’s big winners were mostly battered techies like Google that need a lot of repair work.

It is not clear which groups will lead the market rally. But there are many interesting groups and sectors.

Medical companies such as biotechs and health insurers, which had been leaders of the market’s rally, gave up big gains on Thursday or gave way to riskier names in favor of growth. Is this just a moment?

Nicknames have had a rough outing, such as Hershey (HSY) and other food stocks.

A wide range of housing-related stocks, including builders, suppliers and retailers, are clearing bases or moving above long-term moving averages or trend lines. This includes Dr. Horton (DHI), Tempur-Sili (TPX) and BLDR shares.

Some other retailers, along with a few restaurants and some consumer plays, are showing strength, from Crocs (Crocs) to Wingstop (WING) to GM stock. Some financials, lithium, solar, agriculture and steel stocks also look good, including Steel dynamics (STLD), Albemarle (ALB), CF Industries (CF), Charles Schwab (SCHW) and ENPH shares.

Some infrastructure firms are in or near buying zones, including Quanta Services (PWR).

Energy stocks, which didn’t do much on Thursday, may continue to lead.

Network stocks look solid, incl Digi International (DGII). Several chip names look interesting as the sector recovers from a long slump. That includes GFS shares that are slightly above early records.

But for megacaps like shares of Apple, Microsoft and Tesla, it may be a while before they lead. The same goes for cloud software, with the risk that some may not recover for years, if at all.


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What should we do now

The stock market rally showed strength on Thursday and there is a plausible story that the uptrend has legs after the October inflation report. But for now, it’s just a story.

Ultimately, investors should focus on what the market is doing now by following the action of major indexes and leading stocks.

This signals that it is time to increase the exposure, but not to rush. If this upward trend in the market holds, there will be plenty of time for serious investment.

The limited number of active stocks on Thursday was one of the reasons not to buy heavily. Investors could choose to buy a broad market or sector ETF, such as SPY or SMH.

But there are many stocks and sectors that look interesting. Investors should update their watch lists.

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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