Dow Jones futures tilted higher Tuesday night, along with S&P 500 futures and Nasdaq futures. The stock market rally suffered sharp losses amid rising Treasury yields as Treasury Secretary Janet Yellen warned of a looming government default next month. Micron earnings were in focus overnight.
The S&P 500 and Nasdaq composite fell below their 50-day moving averages in heavy volume, suggesting a change in character for the stock market rally.
Leading stocks looked even worse, with the Innovator IBD 50 ETF (FFTY) on track for its worst weekly loss since the coronavirus crash.
Tech Titans, Growth Leaders Plunge
Tech titans such as Microsoft (MSFT), Google parent Alphabet (GOOGL), while Apple (AAPL) Facebook (FB) and Amazon.com undercut recent lows or set recent closing lows, along with Nvidia (NVDA), ASML (ASML), Applied Materials (AMAT) and ServiceNow (NOW).
Cloudflare (NET), which tumbled to its 50-day line on Monday, tumbled 7.9% on Tuesday, decisively breaking the 50-day line. NET stock has now plunged 17% over the past four sessions, as many software names have come under heavy pressure. Medical product stocks, from biotechs, to testing firms to systems makers, continued to struggle. Even InMode (INMD), which had shrugged off recent market weakness, tumbled 13%.
Energy stocks fared well, holding onto recent gains even as crude oil backed off multiyear highs to close slightly lower. Financials also did fine, with rising Treasury yields providing support.
ASML, Microsoft, Google, ServiceNow and Nvidia stock are all on IBD Leaderboard. Microsoft, ServiceNow, ASML and Google stock are all IBD Long-Term Leaders, with several others also having rough sessions.
The video embedded in the is article highlighted Microsoft, ASML and NET stock.
Janet Yellen U.S. Default Warning
Treasury Secretary Yellen told the Senate Banking Committee that a U.S. default is likely without a debt limit hike by Oct. 18, giving a specific date for the first time. Meanwhile, the government faces a partial shutdown without new funding after Sept. 30. Senate Republicans blocked a debt limit hike and short-term funding measure late Monday, saying they want Democrats to raise the debt limit on their own.
All of this comes as House Speaker Nancy Pelosi plans a Thursday vote on the bipartisan infrastructure bill. It’s unclear if a small number of GOP supporters will offset defections by left-wing Democrats, who want the infrastructure bill tied to a big tax-and-spending reconciliation package that is far from finished..
Meanwhile, Fed chief Jerome Powell, testifying at the same Senate Banking hearing as Treasury Secretary Yellen, said inflation would remain higher for longer than previously anticipated.
Going forward, the Federal Reserve and European Central Bank are inching toward scaling back asset purchases, though actual rate hikes are likely a year away at the earlier.
All of that is helping to push up Treasury yields. The 10-year Treasury yield rose five basis points to 1.53%. Intraday, the 10-year yield nearly hit 1.57%, the highest since June.
Micron stock sank 4% overnight. Shares fell 2.8% to 73.10 on Tuesday, back below the 50-day line. MU stock has been in a downtrend since mid-April.
The Micron outlook isn’t a good sign for semis or the market rally overall, but it’s especially important for memory-exposed chip-equipment makers such as Applied Materials and Lam Research (LRCX). AMAT stock and Lam Research were little changed in extended trading. AMAT stock tumbled 6.9% on Tuesday, back below its 50-day line. LRCX stock gave up 5%, closing below its 50-day and 200-day lines.
Dow Jones Futures Today
Dow Jones futures rose 0.1% vs. fair value. S&P 500 futures climbed 0.1%. Nasdaq 100 futures edged higher.
Crude oil prices, which reversed lower slightly on Tuesday, retreated overnight after the American Petroleum Institute reported a surprise build in U.S. inventories last week. The Energy Information Administration will release its official figures for crude and gasoline supplies and production on Wednesday morning.
Stock Market Rally Tuesday
The stock market rally started weak and closed weaker, in a broad-based sell-off.
The Dow Jones Industrial Average sank 1.6% in Tuesday’s stock market trading. The S&P 500 index skidded 2%. The Nasdaq composite tumbled 2.8%, its worst loss since March. The small-cap Russell 2000 retreated 2.25%.
Apple stock fell 2.4%, not quite undercutting last week’s intraday low but posting its worst close since July 2. That’s when AAPL stock broke out of a cup base.
Microsoft stock slumped 3.6% and Google stock 3.7% both breaking below the 50-day lines and last week’s lows.
FB stock, which undercut its 50-day line on Sept. 20 and has kept retreating, sank 3.7% on Tuesday, below last week’s lows.
AMZN stock, which is still trying to recover from its disappointing Q2 earnings report, fell 2.6%, back to the 200-day line.
NVDA stock undercut its 50-day line and last week’s low, tumbling 4.4% ASML stock, which has been a big-cap semiconductor superstar in 2021, gapped down 6.6%. It was ASML’s first decisive 50-day undercut since March.
NOW stock tumbled 5.7%, closing just below its 50-day line for the first time since early June.
The iShares Expanded Tech-Software Sector ETF (IGV) retreated 3.6%, tumbling below the 50-day line to its worst level since the Aug. 19 bounce. MSFT stock and ServiceNow are key IGV components, while NET stock also is a holding. The VanEck Vectors Semiconductor ETF (SMH) slumped 4%. Nvidia stock and chip-gear makers ASML, AMAT and LRCX are all notable components.
Outside of growth, sector ETFs were generally lower but the losses were smaller.
SPDR S&P Metals & Mining ETF (XME) dipped 0.5% and Global X U.S. Infrastructure Development ETF (PAVE) ceded 1.5%. U.S. Global Jets ETF (JETS) retreated 1.3%. SPDR S&P Homebuilders ETF (XHB) gave up 2.5%. The Energy Select SPDR ETF (XLE) edged up 0.3% and the Financial Select SPDR ETF (XLF) slid 1.65%.
Reflecting more-speculative story stocks, ARK Innovation ETF (ARKK) gave up 3.8% and ARK Genomics ETF (ARKG) 4.2%. ARKK is at its lowest level since early June while ARKG is closing in on its May lows.
Market Rally Analysis
The stock market rally looked revived late last week, but now shows real damage on the major indexes and leading stocks. The S&P 500, which had found support at its 50-day line several months, now seems to be hitting resistance at the key level. The Nasdaq didn’t quite undercut last week’s low — the big-cap Nasdaq 100 did — but finished near session lows with its worst close since Aug. 19.
Despite their energy and financial components, the Dow Jones and small-cap Russell 2000 still fell sharply. The Dow Jones is being turned away from its 50-day line while the Russell 2000 closed a fraction below that key level.
FFTY hasn’t fallen below its the 50-day line, but is down 7.6% so far this week. That’s right, it’s only Tuesday, and FFTY is suffering its worst weekly loss since the March 2020 coronavirus crash. From highfliers to institutional stalwarts, growth names are getting hammered. And even those that had been finding key support, such as NET stock, ASML, Microsoft and Google, are not doing so now.
Energy, fertilizer, financial and travel-related stocks did relatively well. Perhaps we’re in the midst of a sector rotation out of growth stocks, though there’s a big difference between rotation in an overall uptrend vs. rotation in a market retreat. Also, a pullback in energy prices and Treasury yields wouldn’t be a surprise, even if only for the short term.
What To Do Now
If you own stocks that are working, especially in energy, bank or other sectors that are looking healthy, you probably don’t need to take any action. But with growth stocks and with your portfolio overall, you need to take a defensive approach. Recent breakouts or 50-day line rebounds are failing. Big winners are slashing gains. It’s time to scale back your exposure and wait for a healthy market rally to return.
It’s possible that the stock market rally will rebound very quickly, with the major indexes roaring above the 50-day line. Even so, investors should scale back in gradually in that scenario.
But for now, focus on defense. But you should always be prepared for going on offense. Rework your watchlists once again.
Read The Big Picture every day to stay in sync with the market direction and leading stocks and sectors.
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