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The stock market rally saw severe losses after Fed Chairman Jerome Powell said policymakers are “prepared to increase the pace of rate hikes.” The S&P 500 broke through its 21-day moving average and broke below its 50-day line.
Tesla ( TSLA ) fell below a key level, but it could still be constructive action. Technical titans Apple (AAPL), Microsoft (MSFT) and Google Parent Alphabet ( GOOGL ), which were modest gainers on Monday, gave up those gains on Tuesday.
Many leaders held up reasonably well, although others took a little more damage. Delta Air Lines (VALLEY), New relic (NEW) and Canadian Solar Energy (CSIQ) flirted with buy signals as their respective groups performed well.
Investors should be cautious about new purchases in the very short term and may want to reduce overall exposure somewhat.
The video embedded in this article discussed Tuesday’s market action and analyzed DAL shares, Canadian Solar and Freeport-McMoRan.
DAL stock is at the IBD Big Cap 20. New Relic was Tuesday’s IBD Stock of the Day.
Fed chief Powell
Citing stronger economic data, Fed chief Jerome Powell said “the ultimate level of rates is likely to be higher than previously expected.” Markets had already priced in higher rates than the Fed’s late-2022 forecast for a top rate of around 5.1%.
But Powell also signaled that he is open to accelerating Fed rate hikes again. “Should all the data indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
That puts even more pressure on Friday’s February jobs report as well as next week’s CPI inflation report.
The odds of a 50 basis point Fed rate hike on March 22 rose to 70.5%, up from 31% on Monday and 24% a week earlier.
Key earnings
CRWD stock rose solidly after CrowdStrike earnings beat and the cybersecurity play gave bullish guidance. CrowdStrike shares fell 2.1% in Tuesday’s session to 124.93, a sharp gain over the past two months but still well below the 200-day mark. Okta (OKTA), Palo Alto Networks (PANW) and Fortinet (FTNT) has looked stronger.
SoundHound AI ( SOUN ) dipped early Wednesday on a smaller-than-expected fourth-quarter loss and revenue growth that narrowly missed the mark. The AI play provided in-line revenue guidance for 2023. SOUN stock rose 2.15% to 3.33 on Tuesday. SoundHound stock is working on a 5.04 buy point from a consolidation mostly formed above the 200-day mark.
Dow Jones Futures Today
Dow Jones futures lost a fraction of fair value, reversing small gains. S&P 500 futures were lower and Nasdaq 100 futures were just above break-even.
The 10-year Treasury yield was flat at 3.97% after a little over 4% overnight.
Investors will receive the ADP employment report at 8:15 a.m. ET, providing an estimate of private payrolls in February. But the ADP report has an uneven record of forecasts for the Labor Department’s jobs report. The work report for February is issued on Friday.
The JOLTS survey at 10 a.m. ET will reveal January vacancies.
Keep in mind that overnight action in Dow futures and elsewhere does not 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 started slightly higher on Tuesday, but fell sharply due to Fed Chair Powell’s hawkish testimony at 10 p.m. 10 A.M.
The Dow Jones Industrial Average fell 1.7% in Tuesday’s trading. The S&P 500 index slipped 1.5 per cent. The Nasdaq composite gave up 1.25 per cent. The small-cap Russell 2000 retreated 1.2%.
Apple shares fell 1.45%, essentially erasing Monday’s gain. Intraday Monday, AAPL stock hit 156.30, nearly clearing a buy point. Microsoft sank 1.1%, more than offsetting Monday’s diminished 0.6% gain. Apple and Microsoft shares are Dow Jones, S&P 500 and Nasdaq components.
The S&P 500 and Nasdaq giant GOOGL shares fell 1.4%, back to its 50-day line.
The 10-year Treasury yield actually fell 1 basis point to 3.97%. But yields rose on short-term government bonds, which are more closely tied to Fed policy. The 2-year yield rose 12 basis points to 5.01%. The six-month Treasury yield rose 17 basis points to 5.29%.
Meanwhile, the US dollar rose sharply on Powell’s hawkish testimony and generally higher government interest rates, reaching its highest level since late November.
U.S. crude oil prices fell 3.6% to $77.58 a barrel. barrel. Fed concerns about rate hikes, the stronger dollar and weak Chinese imports weighed on crude. Copper prices fell by 2.8% for similar reasons.
ETFs
Among growth ETFs, the Innovator IBD 50 ETF ( FFTY ) fell 0.6%. The iShares Expanded Tech-Software Sector ETF ( IGV ) gave up 1.%, with MSFT stock as a major holding. VanEck Vectors Semiconductor ETF (SMH) retreated 1.2%
As an expression of more speculative story stocks, the ARK Innovation ETF ( ARKK ) gave up 1.7% and the ARK Genomics ETF ( ARKG ) 1.1%. Tesla stock remains a large holding across Ark Invest’s ETFs.
The SPDR S&P Metals & Mining ETF (XME) fell 2.85 percent. The US Global Jets ETF (JETS) rose 0.65%, with DAL shares a notable holding. The SPDR S&P Homebuilders ETF (XHB) fell 1 percent. The Energy Select SPDR ETF (XLE) fell 1.7% and the Financial Select SPDR ETF (XLF) fell 2.6%. The Health Care Select Sector SPDR Fund ( XLV ) yielded 1.6%.
Five Best Chinese Stocks to Watch Now
Tesla stock
Tesla shares fell 3.15% to 187.71, back below its 21-day moving average and its lowest close in a month. The EV giant has an aggressive buy point at 217.75, but investors should probably wait for a decisive move above the 200-day mark. The 200-day line is around 220 and sliding lower. An extended break would bring down the 200-day line in recent consolidation and let the 50-day line catch up.
On Tuesday, China EV registration data showed rising Tesla sales there for the second straight week. But Tesla’s China deliveries are still on track to fall in the first quarter from the fourth quarter, despite big price cuts.
Tesla shares fell 1% before the open.
Berenberg downgraded Tesla stock to hold from a buy, saying the stock price has returned to a fair value. The analyst said Tesla’s price cuts will hit gross margins in the short term, but still sees high margins in the long term.
US auto safety regulators have opened an investigation into Tesla’s Model Y SUV after receiving two complaints that the steering wheels can fall off while being driven.
The National Highway Traffic Safety Administration has opened another Tesla probe, this time over a broken steering wheel. The study covers an estimated 120,000 Model Y vehicles from the 2023 model year. In two cases, Model Ys were delivered to customers without a bolt holding the wheel to the steering column.
Analysis of market rally
The stock market rally did not respond well to Fed Chair Jerome Powell’s hawkish statements and the prospect of faster interest rate hikes and higher interest rates.
The S&P 500 fell below its 21-day moving average and just below its 50-day line. The Nasdaq composite fell through its 21-day line.
The Dow Jones, which hit resistance at the 50-day line on Monday, fell sharply on Tuesday.
Tuesday’s loss followed a generally negative session on Monday. Big-cap indexes erased gains on the day but held up relatively well thanks to Apple shares, Google and Microsoft. But losers outnumbered winners nearly 2-to-1.
The Russell 2000, which fell below its 21-day line on Monday, fell to just above its 50-day line on Tuesday. The small-cap index had its worst close since late January.
Most leading stocks have fallen along with the overall market. Stocks that looked promising on Monday morning have bounced back quite a bit.
Miners like FCX shares stumbled on Tuesday on the stronger dollar and worries about China’s economy. But overall, leading stocks haven’t suffered too much damage yet.
DAL shares and other airlines look healthy, along with many travel names broadly. CSIQ stock is hovering at a buy point with several solar names trying to shine. The NEWR share is consolidating nicely. Tesla stock could use a longer break, but is still behaving relatively well.
With the 10-year Treasury yield nearing 4%, shorter-term yields above 5% and the dollar rallying, it’s understandable that the stock market rally has some issues.
Friday’s jobs report and next week’s CPI inflation report could lock in expectations for a half-point Fed rate hike this month. As Tuesday’s selloff showed, it’s the market reaction that matters, not the news.
The S&P 500 is barely holding the 50-day line and not far from testing its 200-day again. The Nasdaq and Russell 2000 could also easily break below major levels. On the positive side, a move above Monday’s intraday highs would break short-term trend lines for the S&P 500, Nasdaq and Russell.
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What should I do now
Just when the stock market rally seems to be regaining momentum, negative news knocks it back. Is this a short-term lull within a trading range or the start of something more serious? It doesn’t take much to trigger severe weakness or renewed strength.
So investors must be prepared and ready to act.
It is probably best to wait to buy until there is more clarity. At least not many stocks flashed new buy signals on Tuesday. Instead, investors may want to consider exiting or trimming recent positions if they aren’t working.
Continue working on your watchlists. The rangebound market is difficult to play, but many new bases and bullish pullbacks are also taking shape.
Read 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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