Dow Jones futures rose slightly on Tuesday night, as did S&P 500 and Nasdaq futures. The stock rally suffered large losses amid rising Treasury yields as Treasury Secretary Janet Yellen warned of an impending government default next month. Micron’s profits were the center of attention overnight.
The S&P 500 and Nasdaq composite fell below their 50-day moving averages in significant volume, suggesting a character shift for the stock rally.
Major stocks looked even worse, with ETF Innovator IBD 50 (FFTY) on track for its worst weekly loss since the coronavirus crash.
Tech titans, growth leaders plunge
Tech titans such as Microsoft (MSFT), parent company of Google Alphabet (GOOGLE), Apple (AAPL) Facebook (FB) and Amazon.com broke recent lows or set recent closing lows, as did Nvidia (NVDA), ASML (ASML), Applied materials (AMAT) and Service now (NOW).
Cloudflare (NET), which fell to its 50-day line on Monday, fell 7.9% on Tuesday, decisively breaking the 50-day line. NET stock has now plunged 17% in the past four sessions, with software names coming under heavy pressure. Inventories of medical products – from biotechnology to testing companies to system manufacturers – continued to struggle. Same In Mode (INMD), which had ignored recent market weakness, fell 13%.
Energy stocks performed well, holding onto their recent gains, even as crude oil retreated from multi-year highs to close slightly lower. Financials also performed well, with rising Treasury yields providing support.
ASML, Microsoft, Google, ServiceNow, and Nvidia stocks all feature in the IBD rankings. Microsoft, ServiceNow, ASML, and Google Stock are all long-term IBD leaders, with several others having tough sessions as well.
The video embedded in this article highlights Microsoft, ASML, and NET actions.
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Janet Yellen Default Warning in USA
Treasury Secretary Yellen told the Senate Banking Committee that a United States default is likely without an increase in the debt limit by October 18, giving a specific date for the first time. Meanwhile, the government faces a partial shutdown with no new funding after September 30. Senate Republicans blocked an increase in the debt limit and a short-term funding measure on Monday night, saying they wanted Democrats to raise the debt limit themselves.
All of this comes as House Speaker Nancy Pelosi plans a vote on Thursday on the bipartisan infrastructure bill. It’s unclear whether a small number of GOP supporters will make up for defections from left-wing Democrats, who want the infrastructure bill tied to a big tax-spending reconciliation package that’s far from over. .
Meanwhile, Fed chief Jerome Powell, testifying at the same Senate banking hearing as Treasury Secretary Yellen, said inflation would stay higher longer than expected.
The Federal Reserve and European Central Bank are set to cut back on asset purchases, although real rate hikes are likely a year away at the earliest.
All of this is helping to drive up Treasury yields. The 10-year Treasury yield rose five basis points to 1.53%. On an intraday basis, the 10-year rate almost hit 1.57%, the highest since June.
Micronic technology (MU) reported better-than-expected earnings on Tuesday evening. But the giant of the memory chip has fallen sharply.
Micron shares fell 4% overnight. Shares fell 2.8% to 73.10 on Tuesday, back below the 50-day line. MU stock has been on a downtrend since mid-April.
Micron’s outlook is not a good sign for the semi-finals or the rally in the market as a whole, but it is particularly important for chipmakers exposed to memory such as Applied Materials and Lam Research (LRCX). AMAT and Lam Research stock edged down in extended trading. AMAT stock fell 6.9% on Tuesday, slipping back below its 50-day line. LRCX stock fell 5%, closing below its 50 and 200 day lines.
Dow Jones Futures Today
Futures contracts on Dow Jones increased 0.2% from fair value. Futures on the S&P 500 climbed 0.2%. Futures on the Nasdaq 100 advanced 0.1%.
Crude oil prices, which reversed slightly lower on Tuesday, retreated overnight after the American Petroleum Institute announced a surprise increase in US inventories last week. The Energy Information Administration will release its official figures for the supply and production of crude and gasoline on Wednesday morning.
Keep in mind that overnight action on futures contracts on Dow and elsewhere doesn’t necessarily translate into actual trades during the next regular trading session.
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Stock market rally Tuesday
The stock market recovery started weak and ended more weakly, in a generalized liquidation movement.
The Dow Jones Industrial Average fell 1.6% in stock trading on Tuesday. The S&P 500 index slipped 2%. The Nasdaq composite fell 2.8%, its worst loss since March. Small cap Russell 2000 fell 2.25%.
Apple stock fell 2.4%, not quite breaking last week’s intraday low, but posting its worst close since July 2. This is when the AAPL action came out of a cup base.
Microsoft stock fell 3.6% and Google stock fell 3.7%, both falling below the 50-day lines and last week’s lows.
FB stock, which undercut its 50-day line on September 20 and continued to pull back, fell 3.7% on Tuesday, below last week’s lows.
AMZN stock, still trying to recover from its disappointing second quarter earnings report, fell 2.6%, falling back to the 200-day line.
NVDA stock undercut its 50-day line and last week’s low, falling 4.4%.
ASML stock, which was a large-cap semiconductor superstar in 2021, fell 6.6%. This represented ASML’s first decisive 50-day undercut since March.
Stock NOW fell 5.7%, closing just below its 50-day line for the first time since early June.
Among the top ETFs, the Innovator IBD 50 ETF (FFTY) fell 5.4%, while the Innovator IBD Breakout Opportunities (BOUT) ETF slipped 3.9%.
The iShares Expanded Tech-Software Sector (IGV) ETF fell 3.6%, falling below the 50-day line at its worst level since the rebound on August 19. MSFT stock and ServiceNow are key components of IGV; NET shares are also an asset. The VanEck Vectors Semiconductor (SMH) ETF fell 4%. Gear makers Nvidia, ASML, AMAT, and LRCX are all notable components.
Sector ETFs were generally weaker, but losses were smaller.
The SPDR S&P Metals & Mining ETF (XME) fell 0.5% and the Global X US Infrastructure Development ETF (PAVE) fell 1.5%. The US Global Jets ETF (JETS) fell 1.3%. The SPDR S&P Homebuilders ETF (XHB) lost 2.5%. The Energy Select SPDR ETF (XLE) edged up 0.3%. The ETF Financial Select SPDR (XLF) slipped 1.65%.
Mirroring stocks with more speculative stories, ARK Innovation ETF (ARKK) lost 3.8% and ARK Genomics ETF (ARKG) lost 4.2%. ARKK is at its lowest level since early June, while ARKG is approaching its May lows.
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Market rally analysis
The stock rally seemed to have revived at the end of last week, but is now showing real damage on major indices and major stocks. The S&P 500, which had found support on its 50-day line for several months, now appears to be touching resistance at the key level. The Nasdaq didn’t quite break last week’s low – the large-cap Nasdaq 100 did – but finished near session lows with its worst close since August 19.
Despite their energy and financial components, the Dow Jones and Russell 2000 small caps still fell sharply. The Dow Jones moved away from its 50 day line as the Russell 2000 closed a fraction below this key level.
FFTY has not fallen below its 50 day line, but is down 7.6% so far this week. That’s right, it’s only Tuesday, and FFTY suffers its worst weekly loss since the coronavirus crash of March 2020. From highfliers to institutional pillars, the names of growth are hammered out. And even those who had found key media – like NET stock, ASML, Microsoft, and Google – are not doing so now.
Energy, fertilizer, finance and travel stocks performed relatively well. Perhaps we are in the middle of a sector rotation in growth stocks, although there is a big difference between rotating in an overall bullish trend and rotating in a market pullback. Moreover, a decline in energy prices and Treasury yields would not come as a surprise, if only for the short term.
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What to do now
If you own stocks that work, especially in healthy sectors like energy and banking, you probably don’t need to take any action. But with growth stocks and with your portfolio as a whole, you need to take a defensive approach. Recent breakouts or bounces of the 50 day line fail. Big winners reduce winnings. It’s time to reduce your exposure and wait for a healthy market recovery to return.
It is possible that the market rally will rebound very quickly, with major indices breaking through the 50-day line. Even so, investors are expected to gradually cut back in this scenario.
For now, focus on defense. But you must always be prepared to go on the offensive. Rework your watchlists again.
Read The Big Picture every day to stay in tune with the market direction and major stocks and sectors.
Please follow Ed Carson on Twitter at @IBD_ECarson for stock market updates and more.
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