Dow Jones futures rose slightly overnight, along with S&P 500 futures and Nasdaq futures. The stock market’s attempted rally suffered a nasty downside reversal Wednesday following the Fed meeting. KB Home and Coinbase have been major movers of late.
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The Federal Reserve raised rates by a quarter point and signaled another hike this year. Soon after, Fed chief Jerome Powell said he remains committed to fighting inflation. But he also said that tighter conditions from bank problems are taking some pressure off monetary policy.
Meanwhile, Treasury Secretary Janet Yellen, testifying before a Senate panel, denied a report that regulators are considering expanding FDIC insurance to all deposits. On Tuesday, Yellen, Powell’s successor as head of the Fed, signaled to regulators that they were ready to seize deposits more broadly at smaller banks, if necessary.
Bank stocks, in particular, have struggled First Republic Bancorp (FRC) and PacWest Bancorp (PACW).
More broadly, the market rally attempt has relied heavily on six megacaps: Apple stock, Microsoft (MSFT), parent of Google Alphabet (GOOGLE), Tesla (TSLA), Meta Platforms (META) and Nvidia (NVDA). They have strengthened in recent weeks, masking the weak overall range. Apple (AAPL), Google and Meta stock are now in action, despite Wednesday’s reversals. Microsoft is just below a buy point as Tesla stock sets up. Nvidia has significantly expanded.
Nvidia and Meta stock on IBD Leaderboard. AAPL stock and Meta are on SwingTrader. Microsoft and Google are among the IBD Long-Term Leaders.
But even with these six megacaps, it’s not yet a confirmed uptrend. Investors should be cautious.
Fed Rate Increase
The Fed raised rates a quarter-point to a 4.75%-5% range, as expected. New quarterly projections show that policymakers expect the Fed’s key interest rate to end 2023 at 5.1%, signaling another rate hike.
But even that walk is not clear. The Fed’s policy statement said “some additional policy tightening may be appropriate,” somewhat less hawkish from earlier statements’ language of “continued rate hikes.” Fed chief Powell said people should pay attention to “may” and “some.”
The Fed rate outlook is highly dependent on the banking system. Fed chief Powell said bank deposits are “safe” because of the Fed, FDIC and Treasury. But he said it was too early to say how monetary policy should respond to banking stress.
The statement also noted that banking problems are “likely to result in tighter credit conditions.” Powell said that means monetary policy has little to do.
Markets now see a 41% chance of a quarter-point hike in May, down from 60% on Tuesday.
Investors still see rate cuts in the summer, though Powell has signaled they are unlikely.
KB Home Income
KB Home (KBH) reported after closing. KBH stock rose 2.7% in extended trading after KB Home’s earnings topped views and management gave bullish guidance. Shares rose 0.4% to 36.80 on Wednesday, a day after retaking the 50-day line. KB Home stock has 41.02 buy points in a new base after a 62% run from late Sept. to Feb. 2.
Darden Restaurants (DRI), Commercial Metals (CMC), General Mills (GIS), Accenture (ACN) and FactSet Research Systems (FDS) report early Thursday.
SEC Warns Coinbase Of Potential Charges
The SEC late Tuesday served notice on Wells Coinbase (COIN), a formal warning to the cryptocurrency exchange that the regulator may take “enforcement actions” for potential violations of securities laws. Coinbase says it will work normally for now.
COIN stock fell 16% in extended trading. In Wednesday’s session, Coinbase stock fell 8.2% as Bitcoin and other cryptocurrencies sold off following the Fed rate hike.
Dow Jones Futures Today
Dow Jones futures rose 0.35% versus fair value. S&P 500 futures climbed 0.35%. Nasdaq 100 futures advanced 0.4%.
The 10-year Treasury yield fell 3 basis points to 3.47%.
Crude oil futures were down 1% at around $70 a barrel.
Note that overnight action in Dow futures and elsewhere does not necessarily translate into actual trading in the next regular stock market session.
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Stock Market Rally
The stock market rally attempt was muted until the Fed’s rate hike and Fed chief Powell’s comments, then lashed out in the final two hours of trading, closing at session lows. Bank stocks lost significantly on Wednesday, falling on Powell’s comments.
The Dow Jones Industrial Average fell 1.6% in stock market trading on Wednesday. The S&P 500 lost 1.6%, with FRC stock the worst performer of the day. The Nasdaq composite gave up 1.65%. The small-cap Russell 2000, heavily weighted in financials, fell 2.9%
US crude prices rose 1.8% to $70.90 a barrel, up 6.2% so far this week. Copper futures, which closed ahead of the Fed’s meeting decision, climbed 1.2%, its fifth straight advance.
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 losing streak.
ETFs
Among growth ETFs, the Innovator IBD 50 ETF (FFTY) fell 1.3%, while the Innovator IBD Breakout Opportunities ETF (BATTLE) lost 1%. The iShares Expanded Tech-Software Sector ETF (IGV) fell 2%, with MSFT stock a major component of IGV. The VanEck Vectors Semiconductor ETF (SMH) down 0.6%. Nvidia stock is a major SMH holding.
Mirroring stocks with a more speculative story, ARK Innovation ETF (ARKK) slipped 4.8% and ARK Genomics ETF (ARKG) lost 4.3%. Tesla stock is a large holding in Ark Invest’s ETFs.
SPDR S&P Metals & Mining ETF (XME) retreated 2.2% and the Global X US Infrastructure Development ETF (PAVE) down 2.1%. US Global Jets ETF (JETS) decreased by 2.3%. SPDR S&P Homebuilders ETF (XHB) gave 1.7%. The Energy Select SPDR ETF (XLE) fell 2.1% The Health Care Select Sector SPDR Fund (XLV) 1.5%.
Bank Stocks
The Financial Select SPDR ETF (XLF) sank 2.3%. SPDR S&P Regional Banking ETF (KRE) fell 5.7% after 5.8% on Tuesday.
First Republic and PACW stock, along with many KRE holdings, fell 15.5% and 17%, respectively. First Republic could get government support to help facilitate an investment or acquisition, Bloomberg reported Tuesday. PACW stock said on Wednesday it had surrendered a capital raise and secured $1.4 billion in liquidity from Atlas SP, which is owned by Apollo Global Management (GRANDSON). While bank deposits may be “safe,” as Powell put it, bank shareholders may still suffer significant losses or be liquidated.
FRC and PacWest stock both rose modestly overnight.
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Market Rally Analysis
The attempted stock market rally initially responded well to the Fed’s rate hike and chief Powell’s comments, but sold off sharply towards the end.
The S&P 500 was briefly above its 50-day line, but reversed lower just above its 200-day line. The Nasdaq composite touched 12,000 before pulling back.
The Dow Jones is back below the 200-day line. The Russell 2000 fell sharply, below major moving averages.
Losers led winners by nearly 3-to-1 on both the NYSE and Nasdaq. Breadth has been a concern throughout the market rally attempt.
Nvidia stock rose slightly on Wednesday while Apple, Google, Meta and Microsoft stock fell and Tesla fell slightly. But over the past few weeks, those six megacaps have buoyed the S&P 500 and Nasdaq. But the Invesco S&P 500 Equal Weight ETF (RSP), which is just approaching its 200-day line this week, fell 2.25% on Wednesday to its worst close in four months. Meanwhile, the big-cap Nasdaq 100 edged lower, but after hitting its best levels in nearly seven months. The Direxion NASDAQ-100 Equal Weighted Index (QQQE) fell 2.1%, below its 50-day low.
The market often has a second-day reaction to Fed meetings that reverses the initial move. But the Fed-led sell-off may continue. This is still an attempt at a market rally. Look for a follow-through day to confirm the new uptrend.
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What should be done now?
The attempted stock market rally has shown some promising signs at times, but it remains fragmented, volatile and news-driven. Until the banking crisis is firmly in the background and the market shows a broad advance, investors should be cautious.
Investors can have moderate exposure, assuming their positions perform. But don’t let the losses mount.
There is nothing wrong with waiting for a confirmed market uptrend to start moving off the sidelines.
Don’t force the issue. Prepare for the next sustainable market rally by building your watchlists.
Read The Big Picture daily to stay in sync with market direction and top stocks and sectors.
Please follow Ed Carson on Twitter at @IBD_ECarson for stock market updates and more.
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