Dow Jones futures were up slightly after hours, along with S&P 500 futures and Nasdaq futures. The stock market rally attempt took a nasty downturn after the Fed meeting on Wednesday. KB Home and Coinbase were major movers of late.
The Federal Reserve raised interest rates by a quarter point and announced only one rate hike this year. Soon after, Fed chief Jerome Powell said he remains committed to fighting inflation. But he also said tighter conditions due to banking problems put some pressure on monetary policy.
Meanwhile, Treasury Secretary Janet Yellen, testifying to a Senate panel, denied a report that regulators are considering expanding FDIC insurance to all deposits. On Tuesday, Yellen, Powell’s predecessor as Fed chief, indicated that regulators are willing to broaden coverage of deposits at smaller banks if necessary.
Bank stocks in particular struggled First Republic Bancorp (FRC) and PacWest Bancorp (PACW).
More broadly, the attempted market rally relied heavily on six megacaps: Apple stock, Microsoft (MSFT), Google parent Alphabet (GOOGL), Tesla (TSLA), Meta platforms (META) and Nvidia (NVDA). They have moved higher in recent weeks, masking weak overall width. Apple (AAPL), Google and Meta stocks are all usable now despite Wednesday’s reversals. Microsoft is just below a buy point while Tesla’s shares are building. Nvidia has expanded considerably.
Nvidia stock and Meta are on IBD Leaderboard. AAPL Shares and Meta are listed on SwingTrader. Microsoft and Google are Long-Term Leaders on IBD.
But even with these six megacaps, this is not yet a confirmed upward trend. Investors should be careful.
Fed rate hike
As expected, the Fed raised interest rates by a quarter point to a range of 4.75%-5%. New quarterly forecasts show that policymakers expect the Fed’s key interest rate to end at 5.1% in 2023, implying a further rate hike.
But even that walk is not clear. The Fed’s policy statement said “some additional policy tightening may be appropriate”, somewhat less aggressively than previous statements about “continued rate hikes”. Fed chief Powell said people should pay attention to “may” and “some”.
The Fed rate outlook will depend heavily on the banking system. Fed chief Powell said bank deposits are “safe” thanks to the Fed, FDIC and Treasury. But he said it is too early to say how monetary policy should respond to banking stress.
The statement also noted that banking problems are “likely to lead to tighter credit conditions”. Powell said this means monetary policy has less to do.
Investors are still seeing interest rate cuts through the summer, even as Powell signals that’s unlikely.
KB Home Income
KB Home (KBH) reported after the close. KBH shares rose 2% in extended trading after KB Home’s earnings beat opinions and management provided bullish guidance. Shares rose 0.4% to 36.80 on Wednesday, one day after retaking the 50-day line. KB Home shares are at a buy point of 41.02 in a new base after a 62% run from the end of September to February 2.
Darden Restaurants (D.R.I.), Commercial metals (CMC), General Mills (GIS), accent (ACN) and FactSet Research Systems (FDS) reports early Thursday.
SEC warns Coinbase of potential charges
The SEC issued a Wells notice on Tuesday evening to Coin base (COIN), a formal warning to the cryptocurrency exchange that the regulator may take “enforcement action” for potential violations of securities laws. Coinbase said it would operate normally for now.
COIN Shares Plunged 16% During Extensive Trading. During Wednesday’s session, Coinbase shares fell 8.2% as Bitcoin and other cryptocurrencies sold off following the Fed’s rate hike.
Dow Jones Futures Today
Dow Jones futures rose 0.2% from fair value. S&P 500 futures rose 0.2%. Nasdaq 100 futures rose 0.1%.
The 10-year Treasury yield fell 5 basis points to 3.45%. The 2-year rate fell 3 basis points to 3.95%.
Crude oil futures fell 1% to about $70 a barrel.
Remember that overnight action in Dow futures and elsewhere does not necessarily translate into actual trading in the next regular trading session.
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Stock market rally
The stock market rally attempt was quiet until the Fed rate hike and comments from Fed Chief Powell. Bank stocks were big losers on Wednesday, tumbling on Powell’s comments.
The Dow Jones Industrial Average fell 1.6% in Wednesday’s stock trading. The S&P 500 lost 1.6%, with FRC stock the worst performer of the day. The Nasdaq composite was down 1.65%. The small-cap Russell 2000, heavily weighted in financials, sold 2.9%
US crude oil prices rose 1.8% to $70.90 a barrel, up 6.2% year-to-date this week. Copper futures, which were closed before the Fed meeting’s decision, rose 1.2%, the fifth straight increase.
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 its lowest level since early February, extending a series of losses.
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 Tech-Software Sector ETF (IGV) fell 2%, with MSFT stocks the core component of the IGV. The VanEck Vectors Semiconductor ETF (SMH) fell 0.6%. Nvidia stock is a large SMH holding company.
Reflecting more speculative story stocks, ARK Innovation ETF (ARKK) lost 4.8% and ARK Genomics ETF (ARKG) lost 4.3%. Tesla stock is a huge stake in Ark Invest’s ETFs.
SPDR S&P Metals & Mining ETF (XME) lost 2.2% and the Global X US Infrastructure Development ETF (PAVE) lost 2.1%. US Global Jets ETF (JETS) fell 2.3%. SPDR S&P Homebuilders ETF (XHB) lost 1.7%. The Energy Select SPDR ETF (XLE) lost 2.1%, the Health Care Select Sector SPDR Fund (XLV) 1.5%.
The Financial Select SPDR ETF (XLF) fell 2.3%. SPDR S&P Regional Banking ETF (KRE) tumbled 5.7% after rising 5.8% on Tuesday.
First Republic and PACW shares, from many KRE holdings, fell 15.5% and 17%, respectively. First Republic could receive government assistance to facilitate an investment or acquisition, Bloomberg reported Tuesday. PACW shares said Wednesday it had abandoned a capital raise and obtained $1.4 billion in liquidity from Atlas SP, owned by Apollo GlobalManagement (APO). While bank deposits may be “safe,” as Powell said, bank shareholders could still suffer massive losses or be wiped out.
FRC shares and PacWest both rose modestly overnight.
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Analysis of the market rally
The attempted stock market rally initially responded well to the Fed’s rate hike and Chief Powell’s comments, but was sold hard by the end.
The S&P 500 briefly moved above the 50-day line, but returned to just above the 200-day line. The Nasdaq composite hit 12,000 before pulling back.
The Dow Jones returned below the 200-day line. The Russell 2000 fell sharply, well below the major moving averages.
Losers led winners nearly 3-to-1 on both the NYSE and Nasdaq. Width has been a concern during the attempted market rally.
Shares of Nvidia rose slightly on Wednesday, while shares of Apple, Google, Meta and Microsoft fell lower and Tesla fell modestly. But in recent weeks, those six mega caps have fueled the S&P 500 and Nasdaq. But the Invesco S&P 500 Equal Weight ETF (RSP), which only approached the 200-day mark this week, fell 2.25% on Wednesday to its worst closing price in four months. Meanwhile, the big-cap Nasdaq 100 fell lower, but after reaching its best levels in nearly seven months. The Direxion NASDAQ-100 Equal Weighted Index (QQQE) lost 2.1%, back under 50 days.
The market often reacts to Fed meetings on the second day that reverse the initial move. But the Fed-led sell-off could continue. This is still just an attempted market rally. Look for a follow-up day to confirm the new uptrend.
Time the market with IBD’s ETF market strategy
What to do now
The attempted stock market rally has yielded promising hints at times, but it remains divided, volatile and news-driven. Until the banking crisis is firmly in the background and the market shows a broad run, investors should exercise caution.
Investors can have modest exposure assuming their positions work. But don’t let the losses mount.
There is nothing wrong with waiting for a confirmed market uptrend to get off the sidelines.
Do not try to force the problem. Prepare for the next sustained market rally by building your watchlists.
Read The Big Picture every day to stay in sync with market direction and leading stocks and sectors.
Follow Ed Carson on Twitter at @IBD_ECarson for stock market updates and more.
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