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Futures: Why This Market Is So Dangerous

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Dow Jones futures tilted lower in extended trading, along with S&P 500 futures and Nasdaq futures. The stock market rally had a flat-to-lower session Wednesday.




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The Nasdaq led declines as Apple (AAPL), Google parent Alphabet (GOOGL) and Tesla stock extended big weekly losses. Apple and Google stock broke below some support levels while Tesla (TSLA) is closing in on its bear market lows.

The sideways action over the last several weeks has been challenging for buying on strength. Choppy markets chop investors up. It’s not a good time to be adding exposure.

Late Wednesday, the Pentagon said that Amazon.com (AMZN), Google, Microsoft (MSFT) and Oracle (ORCL) won cloud-computing contracts that could each reach $9 billion through 2028. In 2019, the Defense Department awarded a $10 billion cloud-computing contract, but cancelled that deal in 2021 amid Amazon’s objections.

The four tech giants were little changed in after-hours trading.

Dow Jones Futures Today

Dow Jones futures dipped 0.1% vs. fair value. S&P 500 futures declined 0.15% and Nasdaq 100 futures fell 0.2%.

The 10-year Treasury yield rose 4 basis points to 3.45%.

Crude oil futures climbed slightly.

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 Rally

The stock market rally traded modestly lower for most of Wednesday session, closing generally in the red.

The Dow Jones Industrial Average climbed less than two points in Wednesday’s stock market trading. The S&P 500 index dipped 0.2%. The Nasdaq composite fell 0.5%. The small-cap Russell 2000 declined 0.3%.

U.S. crude oil prices fell 3% to $72.01 a barrel, continuing to slide on global demand fears. Gasoline futures sank 3.4% to a one-year low. Natural gas prices popped 4.6% after a sharp five-session slide.

The 10-year Treasury yield plunged 10 basis points to 3.41%, hitting the lowest level in nearly three months.

The inverse relationship between stocks and bond yields is waning because Treasury yields are now falling more on recession fears that easing inflation pressures. A tame November CPI report on Dec. 13 would still be cheered. While a half-point rate hike seems highly likely on Dec. 14, progress on inflation would raise hopes for smaller hikes in early 2023 and an earlier end to tightening. That would reducing the risks of a slump, or at least a hard landing.

ETFs

Among growth ETFs, the iShares Expanded Tech-Software Sector ETF (IGV) fell 0.5%. The VanEck Vectors Semiconductor ETF (SMH) closed just below break-even. Reflecting more-speculative story stocks, ARK Innovation ETF (ARKK) fell 0.8% and ARK Genomics ETF (ARKG) rose 0.3%. TSLA stock is a major holding across Ark Invest’s ETFs.

SPDR S&P Metals & Mining ETF (XME) dipped 0.3% and the Global X U.S. Infrastructure Development ETF (PAVE) lost a fraction. U.S. Global Jets ETF (JETS) tumbled 3.3%. SPDR S&P Homebuilders ETF (XHB) rose 1.8%. The Energy Select SPDR ETF (XLE) edged down 0.2% and the Financial Select SPDR ETF (XLF) declined 0.4%. The Health Care Select Sector SPDR Fund (XLV) climbed 0.8%.


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Apple Stock And Google Stock

Apple stock fell 1.4% on Wednesday to 140.94, hitting the lowest level since Nov. 10. So far this week, AAPL stock has tumbled 4.65%, undercutting its 50-day line. The Dow Jones tech titan is nearing its Oct. 13 low of 134.37 but still has some distance from its bear market low of 129.04 set on June 16.

Google stock slumped 2.1% to 94.94, below its 50-day line. GOOGL stock is off 5.4% so far this week, wiping the gains from the three prior weeks. Shares are still comfortably above their Nov. 3 bear market low of 83.34.

Tesla Stock

Tesla stock skidded 3.2% to 174.04 on Wednesday, closing in on the bear market low of 166.19 set Nov. 22. TSLA stock is off 10.7% so far this week.

On Wednesday, Tesla cut China prices by 6,000 yuan for cars in inventory. Along with insurance subsidies, free charging and other goodies, Tesla is offering over 21,000 yuan in incentives for cars on the lot. That follows a late October price cut across the board in China. And it comes ahead of government EV subsidies ending Dec. 31, which should be pulling demand forward. This also comes amid widespread reports — denied by Tesla —  of looming Shanghai production cuts.

Meanwhile, Tesla reportedly will reintroduce radar into its vehicles in early 2023. Elon Musk pulled radar in 2021, saying vision-only was better for self-driving, in contrast to nearly all others working on autonomous driving.


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Market Rally Analysis

The stock market rally continued its pullback, though the technical picture didn’t change significantly.

The Nasdaq tested its 50-day line, a day after falling below its 21-day moving average. Apple stock, Google and Tesla weighed on the big-cap indexes, but the underlying trend was slightly lower.

The major indexes have generally trended higher from their Oct. 13 lows, especially the Dow Jones and S&P 500. The market rally appeared to be gaining momentum late last week, with the S&P 500 above its 200-day line and the Dow Jones hitting a seven-month high.

But with the recent pullback, the major indexes and Russell 2000 are essentially where they were in early November or late October.

Sideways markets are among the most dangerous for investors, especially when there is volatility up and down. There’s just enough strength on the upside to lure buyers in, but then the market swings lower for a time. That forces investors to either cut losses when they’re small — with a good chance that stocks will rebound — or risk a much-bigger decline.

The current choppy market rally has an added hurdle. Most of the advance has come on a handful of one-day sessions, so it’s hard to have even mini-uptrends to build gains in new positions.


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What To Do Now

The stock market rally has hit resistance and is testing some key levels, but isn’t seriously damaged yet. If you have modest exposure with positions that are working, you needn’t exit. Taking partial profits is never a bad idea in this market, of course.

But there’s a strong chance that anyone buying stocks over the past several weeks as they broke out or flashed early buy signals is down on those holdings. In a sideways, choppy market, when stocks start looking interesting they may be about to peak.

Investors should be wary of adding exposure until the market can clear the recent trading range, with the S&P 500 decisively above its 200-day line. That may not happen until after next week’s CPI inflation report and Fed meeting.

Even then, investors should increase positions slowly, in case the major indexes once again pull back after hitting short-term highs.

But keep working on those watchlists. Industrial and infrastructure plays are looking good, along with a variety of medicals. Some brokerages are hovering around buy points. Chip-equipment names are showing relative strength, with a number of semiconductor plays holding up OK.

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.

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