Dow Jones futures rose slightly early Thursday, while S&P 500 futures rose modestly and Nasdaq futures rose. The stock market’s attempted rally suffered a nasty reversal lower on Wednesday after the Fed meeting and comments from Treasury Secretary Janet Yellen. KB Home and Coinbase were key movers overnight.
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The Federal Reserve raised rates by a quarter point and signaled just one more hike this year. Soon after, Fed chief Jerome Powell said he remains committed to fighting inflation. But he also said that the tighter conditions due to the banking problems take some of the pressure off monetary policy.
Meanwhile, Treasury Secretary Yellen, testifying before a Senate panel, said “there will not be blanket insurance” for all deposits, denying a report that regulators were considering such a step. On Tuesday, Yellen, Powell’s predecessor as Fed chief, signaled that regulators are ready to cover deposits more broadly at smaller banks, if necessary.
Bank stocks struggled, particularly First Republic Bancorp (CRF) and PacWest Bancorp (PACW).
More broadly, the market’s attempted rally has relied heavily on six mega-caps: Apple stock, Microsoft (MSFT), father of Google Alphabet (GOOGL), tesla (TSLA), metaplatforms (GOAL) and nvidia (NVDA). They have rallied further in recent weeks, masking weak overall breadth. Apple (AAPL), Google and Meta shares are actionable now, despite Wednesday’s reversals. Microsoft is just below a buy point as Tesla’s stock is setting up. Nvidia scales up significantly.
Nvidia and Meta stocks are on the IBD leaderboard. AAPL and Meta stocks are on SwingTrader. Microsoft and Google are in the long-term leaders of the IBD.
But even with these six megacaps, this is still not a confirmed uptrend. Investors should be cautious.
Dow Jones Futures Today
Dow Jones futures were up 0.2% against fair value. S&P 500 futures rose 0.5%. Nasdaq 100 futures rose 1%.
The 10-year Treasury yield fell 1 basis point to 3.49%.
Crude oil futures fell slightly.
Remember that overnight action in Dow futures and elsewhere doesn’t necessarily translate into actual trading at the next regular stock market session.
Fed rate hike
The Fed raised rates by a quarter point to a range of 4.75%-5%, as expected. The new quarterly projections show that policymakers expect the Fed’s key interest rate to end 2023 at 5.1%, implying another rate hike.
But even that walk is unclear. The Fed’s policy statement said “some additional policy reaffirmation may be appropriate,” slightly less harsh than the language of previous “continued rate hikes” statements. Fed chief Powell said people should pay attention to “may” and “some.”
The Fed’s rate outlook will largely depend on the banking system. Fed chief Powell said bank deposits are “safe” thanks to the Fed, FDIC and Treasury. But he said it’s too soon to say how monetary policy should respond to bank stress.
The statement also noted that the banking problems “are likely to result in tighter credit conditions.” Powell said that means monetary policy has less to do.
Markets now see just a 44% chance of a quarter-point rise in May, down from 60% on Tuesday.
Investors still see rate cuts through the summer, even with Powell noting that’s unlikely.
key gains
KB Home (KBH) reported after the shutdown. KBH shares rose 2.7% in extended trading after KB Home earnings outpaced sentiment and management gave bullish guidance. The shares rose 0.4% to 36.80 on Wednesday, a day after retaking the 50-day line. KB Home shares have a buy point of 41.02 on a new basis after rising 62% from late September to February 2.
Commercial Metals (CMC), Accent (ACN), Darden Restaurants (DRI), general mills (GIS) and FactSet Investigation Systems (FDS) beat all quarterly forecasts early Thursday. ACN shares rose solidly. Darden Restaurants and GIS shares rose while Commercial Metals and FDS were not yet active.
SEC warns Coinbase of potential charges
On Tuesday night, the SEC issued a notice of Wells to coin base (COIN), a formal warning to the cryptocurrency exchange that the regulator may take “enforcement action” for possible violations of securities laws. Coinbase said it would operate normally for now.
COIN shares fell 13% in premarket trading. In trading on Wednesday, Coinbase shares fell 8.2% as Bitcoin and other cryptocurrencies sold off after the Fed rate hike.
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stock rally
The stock market’s attempted rally was quiet until the Fed rate hike and comments from Fed chief Powell, and then tumbled in the last two hours of trading, closing at session lows. Bank shares fell significantly on Wednesday, falling on Powell’s comments.
The Dow Jones industrial average fell 1.6% in trading on Wednesday. The S&P 500 lost 1.6%, and FRC shares were the worst performer of the day. The Nasdaq Composite lost 1.65%. The small-cap Russell 2000, heavily weighted in financials, sold 2.9%
US crude prices rose 1.8% to $70.90 a barrel, up 6.2% so far this week. Copper futures, which closed before the Fed meeting decision, rose 1.2%, its fifth straight gain.
The 10-year Treasury yield fell 11 basis points to 3.5%. The 2-year Treasury yield fell 20 basis points to 3.98%.
The US dollar fell sharply to the lowest levels since early February, extending a losing streak.
ETFs
Among growth ETFs, the Innovator IBD 50 ETF (FFTY) fell 1.3%, while the Innovator IBD Breakout Opportunities ETF (BOUT) lost 1%. The iShares Expanded Technology Software (IGV) Sector ETF fell 2%, with MSFT shares a core component of the IGV. The VanEck Vectors Semiconductor (SMH) ETF fell 0.6%. Nvidia shares are a major holding of SMH.
Reflecting more speculative historical stocks, the ARK Innovation ETF (ARKK) slid 4.8% and the ARK Genomics ETF (ARKG) lost 4.3%. Tesla stock is a big holding in Ark Invest ETFs.
SPDR S&P Metals & Mining ETF (XME) fell 2.2% and the Global X US Infrastructure Development ETF (PAVE) lost 2.1%. The US Global Jets ETF (JETS) fell 2.3%. SPDR S&P Homebuilders ETF (XHB) was down 1.7%. The Energy Select SPDR ETF (XLE) declined 2.1%. The Health Care Select Sector SPDR Fund (XLV) declined 1.5%.
bank stocks
The Financial Select SPDR ETF (XLF) sank 2.3%. SPDR S&P Regional Banking ETF (KRE) fell 5.7% after rising 5.8% on Tuesday.
Shares of First Republic and PACW, among many KRE holdings, fell 15.5% and 17%, respectively. First Republic could get government backing to help facilitate an investment or acquisition, Bloomberg reported Tuesday. PACW shares said Wednesday that they have foregone a capital raise and raised $1.4 billion in liquidity from Atlas SP, owned by Apollo Global Management (APO). While bank deposits may be “safe,” as Powell claimed, bank shareholders could still suffer heavy losses or disappear.
FRC and PacWest shares rose modestly overnight.
Five best Chinese stocks to watch now
Market recovery analysis
The stock market’s attempted rally initially responded well to the Fed’s rate hike and Chief Powell’s comments, but was sold off until the close.
The S&P 500 briefly broke above its 50-day line, but pulled back lower to just above its 200-day line. The Nasdaq Composite touched 12,000 before pulling back.
The Dow Jones fell back below the 200-day line. The Russell 2000 fell sharply, well below the key moving averages.
Losers led winners nearly 3-1 on both the NYSE and Nasdaq. Breadth has been a concern throughout the market rally attempt.
Nvidia shares were up slightly on Wednesday, while shares of Apple, Google, Meta and Microsoft were down and Tesla fell modestly. But in recent weeks, those six megacaps have boosted the S&P 500 and the Nasdaq. But the Invesco S&P 500 Equal Weight ETF (RSP), which was only nearing its 200-day line this week, fell 2.25% on Wednesday to its worst close in four months. Meanwhile, the large-cap Nasdaq 100 pulled back lower, but after hitting its best levels in nearly seven months. The Direxion NASDAQ-100 Equal Weighted Index (QQQE) lost 2.1%, again below its 50-day index.
The market often has a second day reaction to Fed meetings that reverses the initial move. But the Fed-led sell-off could continue. This is still just an attempt to recover the market. Look for a follow-up day to confirm the new uptrend.
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What to do now
The stock market’s attempted rally has shown some promising signs at times, but it remains split, volatile and news-driven. Until the banking crisis is firmly in the background and the market shows a broad rally, investors should be cautious.
Investors might have modest exposure, assuming their positions work out. But don’t let the losses increase.
There is nothing wrong with waiting for an uptrend in the market to be confirmed to start shelving.
Don’t try to force the issue. Prepare for the next sharp market rally by building your watch lists.
Read The Big Picture every day to stay in sync with market direction and major stocks and sectors.
Follow Ed Carson on Twitter at @IBD_ECarson for stock market updates and more.
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