Dow Jones futures changed little overnight along with S&P 500 futures and Nasdaq futures.
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The stock market rally rebounded strongly Thursday morning, but major indices cut intraday gains, while the Russell 2000 hit a new low in 2023 as Moody’s Investor Service warned of broader banking contagion and economic fallout. Shares rose late in the session as Treasury Secretary Janet Yellen promised “additional actions” for bank deposits if needed. On Wednesday, major indices fell sharply lower on comments from Yellen and the Federal Reserve’s interest rate hike.
Bank stocks were big losers on Thursday. First Republic (FRC) slid to a record low and PacWest Bancorp (PACW) to an all-time low. But superregionals like Key Corp (KEY) and Comerica (CMA) also sold out, with even some giants like bank of America (BAC) hits multi-year lows.
On the positive side, Meritage houses (MTH) and KBH stocks flashed buy signals amid strong KB Home (KBH) earnings and generally strong action among builders. Microsoft (MSFT) traded back above a buy point. Jamie China (YUMC) broke out. The VanEck Semiconductor ETF (SMH) cleared a buying point and provided a way to play the chip sector with NVDA stocks and many hot semis extended.
MTH stock and Nvidia (NVDA) are on the IBD Leaderboard. MSFT shares are listed on IBD Long-Term Leaders. Meritage and KBH stocks are on the IBD 50, along with several other homebuilders. Meritage Homes is the IBD stock of the day on Thursday.
But investors should remain cautious. Yes, a rally attempt is underway, but it is still a market correction. The rally effort remains divided and volatile, with the banking sector a major negative.
Moody’s: ‘unrest’ at larger banks a risk
There is a growing risk that regulators “will be unable to contain the current turmoil without long-lasting and potentially serious repercussions inside and outside the banking sector”. That could cause greater “financial and economic damage than we expected,” Moody’s Investor Service warned Thursday. Yet the rating agency still expects policymakers to “generally succeed”.
Bank stocks and major indices came off the lows of the afternoon as Treasury Secretary Yellen said in prepared remarks to a House committee that the administration would be “ready to take additional action if warranted”.
Aside from that line, Yellen largely echoed Wednesday’s remarks to a Senate panel, when she said officials are not seeking a “blanket” guarantee for all deposits at all banks. That comment helped spark Wednesday’s market downturn. However, Yellen had previously indicated that any struggling bank will encourage further deposit guarantees.
The FDIC aims to reveal the fate of SVB Financial’s Silicon Valley Bank this weekend, Barron’s Advisor reported Thursday.
Dow Jones Futures Today
Dow Jones futures rose a fraction from fair value. S&P 500 futures and Nasdaq 100 futures were stable.
Crude oil futures fell slightly.
Remember that overnight action in Dow futures and elsewhere does not necessarily translate into actual trading in the next regular trading session.
Join IBD experts as they analyze actionable stocks in the stock market rally on IBD Live
Stock market rally
The attempted rally in the stock market saw large intraday gains sizzle, although major indices closed higher after becoming mixed by mid-afternoon.
The Dow Jones Industrial Average climbed 0.2% during Thursday trading. The S&P 500 index rose 0.3% Zion Bank Corp (ZION), Comerica and KEY are the three worst performing stocks. The Nasdaq composite climbed 1%. The small-cap Russell 2000 lost 0.8%.
US crude oil prices fell 1.3% to $69.95 a barrel. Copper futures rose 1.9%, up 7.5% on a six-session profit streak.
The yield on 10-year Treasury bills fell 9 basis points to 3.41%. The two-year interest rate fell by 17 basis points to 3.81%.
Despite signals from the Fed on Wednesday that the central bank will hike again, markets see a 66% chance of a break in May, compared to 50.1% on Wednesday and 39.7% on Tuesday. Investors expect the Fed’s interest rate cuts to start this summer.
ETFs
Among growth ETFs, the Innovator IBD 50 ETF (FFTY) was up 1.2%, while the Innovator IBD Breakout Opportunities ETF (BOUT) was up 0.7%. The iShares Expanded Tech-Software Sector ETF (IGV) was up 1.5%, with Microsoft stocks a key component. The VanEck Vectors Semiconductor ETF (SMH) soared 2.7%. NVDA stock is a major SMH holding company.
Reflecting more speculative story stocks, ARK Innovation ETF (ARKK) fell 1.5% and ARK Genomics ETF (ARKG) gained 0.7%. Coin base (COIN) and Square parent Block (SQ), both top-10 Ark Invest holdings, fell more than 10% on Thursday.
SPDR S&P Metals & Mining ETF (XME) was up 0.3% and the Global X US Infrastructure Development ETF (PAVE) was down 0.3%. US Global Jets ETF (JETS) fell 1%. SPDR S&P Homebuilders ETF (XHB) closed just below breakeven. The Energy Select SPDR ETF (XLE) fell 1.4%. The Health Care Select Sector SPDR Fund (XLV) fell slightly by 0.2%.
The Financial Select SPDR ETF (XLF) lost 0.7% to a five-month low. BAC shares are a notable XLF holding company. SPDR S&P Regional Banking ETF lost 2.8%, reaching its worst level since late 2020. First Republic, PACW, KEY and CMA shares are all owned by KRE.
Five best Chinese stocks to watch right now
Analysis of the market rally
For a second consecutive session, the market rally attempt led to large intraday gains. Major indices fell sharply on Wednesday. They closed higher on Thursday, but it wasn’t the action you want to see in a market rally.
The Nasdaq was still up solid thanks to megacap technologies like Microsoft stock, Nvidia and Meta platforms (META). But it was an inside day, giving up more than half of its 2.5% intraday bounce.
The S&P 500 bounced off its 200-day line, but encountered resistance near its 50-day line. The Invesco S&P 500 Equal Weight ETF (RSP), which was not dominated by those mega-cap techs, fell 0.35%, marking a five-month low.
The Dow Jones tried to reclaim the 200-day line, but pulled back the gains. The Russell 2000 opened strong, but returned lower as banking stocks deteriorated again.
The chip sector still looks robust. nvidia stock, Aehr test systems (AEHR) and a few others go higher, but are generally comprehensive. Several others, such as Applied materials (AMAT), are near buy areas, but don’t really outperform the SMH ETF.
Homebuilders look strong. KBH shares and Meritage rose to official buy points, but trimmed intraday gains.
YUMC stock broke from a flat base. Yum China revenue should boom in 2023 now that Covid restrictions have been lifted.
But the width is narrow.
A sustained market rally is almost impossible if the banking crisis worsens. SVB Financial was an outlier in many ways, so seeing other California-based banks such as FRC Stock and PacWest come under pressure was a bad sign. Much worse when super-regionals like CMA stock and KeyCorp start to buckle. BAC shares are at their worst level since 2020. Even JPMorgan Chase (IBD), one of the best capitalized banks, is testing the recent 2023 lows and its 200-day line.
Ex-FDIC chief Sheila Bair told MarketWatch on Thursday that the issue of unrealized bond losses is “a risk that all banks face,” not just regional players.
Time the market with IBD’s ETF market strategy
What to do now
The market rally attempt is divided, volatile and news driven. It is not a confirmed upward trend.
Investors can try playing single leaders. But while some, such as Nvidia and Holding on (ONON) have worked, many others have failed. Anyone who has been buying stocks on strength over the past two days is likely sitting on at least modest losses.
So keep your exposure light and reduce losses quickly. With winners, consider taking at least a partial profit quickly to ensure you make a profit.
There is nothing wrong with staying wholly or entirely in cash until there is a sustained market rally backed by bank headlines.
Either way, investors need to stay engaged and ready to trade. That means being prepared with up-to-date watchlists and having your exit strategies in order.
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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