Dow Jones futures were little changed after hours, along with S&P 500 futures and Nasdaq futures. Cloudflare headlined overnight earnings reports.

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The stock market rally started Thursday strong but reversed solidly lower, undercutting the lows of the prior few days. It’s a reason to be cautious in the very short term. But the pullback could be setting the stage for another solid advance.

Tesla (TSLA) continued to climb Thursday, even though the EV giant pared intraday gains. TSLA stock has now more than doubled from its Jan. 6 bear-market low. The broader auto sector, from EV makers to traditional car giants and auto parts makers, is doing well.

Google parent Alphabet (GOOGL) continued to sell off following Wednesday’s AI event. Microsoft (MSFT) is seen as much further along than Google and Baidu (BIDU) in actually exploiting AI benefits.

Key Earnings

Cloudflare (NET), Alteryx (AYX), Expedia (EXPE), Dexcom (DXCM), PayPal (PYPL) and Lyft (LYFT) reported after the close.

NET stock surged 9% overnight as Q4 EPS and revenue just topped views, with the software maker also giving solid guidance. Cloudflare is set to gap above a cup-with-handle bottoming base with a 65.61 buy point. Meanwhile, AYX leapt 9% on strong earnings, with the database software maker building the right side of a deep cup base.

The Cloudflare and Alteryx earnings reports are a positive for other highly valued software plays such as Snowflake (SNOW). SNOW stock, which joined IBD Leaderboard on Thursday, rose modestly in late trading.

EXPE stock fell 2% overnight as EPS fell well short and revenue disappointed.

Diabetes products maker Dexcom beat EPS views. DXCM stock rose 4%, signaling a test at the 50-day line within a consolidation.

LYFT stock plunged 30% on a wider than expected loss and weak Q1 revenue guidance.

PYPL stock edged lower despite strong PayPal earnings and guidance. CEO Dan Schulman will leave at the end of 2023. Shares are off late 2022 bear market lows but have been hitting resistance.

Dow Jones Futures Today

Dow Jones futures rose a fraction vs. fair value, along with S&P 500 futures. Nasdaq 100 futures edged higher. Remember that overnight action in Dow futures and elsewhere doesn’t necessarily translate into actual trading in the next regular stock market session.

Join IBD experts as they analyze actionable stocks in the stock market rally on IBD Live

Stock Market Rally

The stock market rally had a tough session, reversing sharply lower.

The Dow Jones Industrial Average fell 0.7% in Thursday’s stock market trading. The S&P 500 index retreated 0.9%. The Nasdaq composite declined 1%. The small-cap Russell 2000 skidded 1.4%

U.S. crude oil prices dipped 0.5% to $78.06 a barrel.

The 10-year Treasury yield rose five basis points to 3.68%, reversing higher after declining to 3.58% intraday. The yield has jumped 35 basis points from its Feb. 2 intraday low.

ETFs

Among growth ETFs, the Innovator IBD 50 ETF (FFTY) dipped 0.3%. The iShares Expanded Tech-Software Sector ETF (IGV) edged down 0.1%, with MSFT stock a major holding. The VanEck Vectors Semiconductor ETF (SMH) climbed 0.5%.

Reflecting more-speculative story stocks, ARK Innovation ETF (ARKK) and ARK Genomics ETF (ARKG) both fell 3%. Tesla stock is a major holding across Ark Invest’s ETFs.

SPDR S&P Metals & Mining ETF (XME) gave up 1% and the Global X U.S. Infrastructure Development ETF (PAVE) slid 1%. U.S. Global Jets ETF (JETS) slumped 2.1%. SPDR S&P Homebuilders ETF (XHB) gave up 0.5%. The Energy Select SPDR ETF (XLE) declined 0.8% and the Financial Select SPDR ETF (XLF) shed 1.1%. The Health Care Select Sector SPDR Fund (XLV) gave up 0.9%

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Google Stock AI Sell-Off Continues

Google stock skidded 4.4% to 95.01, testing its 50-day line after tumbling 7.7% on Wednesday. Google’s new chatbot tool Bard gave an inaccurate answer during a Wednesday presentation.

Microsoft stock retreated 1.2% to 263.62. MSFT stock is still up for the week, buoyed by a successful event Tuesday as the software giant integrated OpenAI’s ChatGPT into its Bing search service.

The fear for Google is twofold. Microsoft’s Bing could grab some market share from Google search. Secondly, running AI chatbots is very expensive, and Google’s costs will be far higher than Microsoft’s due to its search dominance.

There was also a bit of a heat check for white-hot speculative AI plays. C3.ai (AI), BigBear.ai Holdings (BBAI), SoundHound (SOUN) and Veritone (VERI) all retreated.

Tesla Stock Doubles

Tesla popped 3% to 207.32, closing in on its 200-day moving average. Shares backed off an intraday high of 214. But TSLA stock has surged 103% from its Jan. 6 intraday low of 101.81. At this point, investors should look to see if TSLA stock can reclaim its 200-day line and then perhaps consolidate, forging a handle within a deep base going back to September.

Tesla stock fell slightly after hours.

Tesla’s price cuts have buoyed demand for its EVs, though likely at the expense of margins. A key question is whether demand will remain strong or will start to fade as the weeks go on. CEO Elon Musk says he’ll unveil his “Master Plan 3” at a March 1 investor event. Tesla has already said it’ll provide more details at the event for a new EV platform, perhaps for a cheaper model.

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Market Rally Analysis

The stock market rally opened solidly higher Thursday, with the Nasdaq up 1.4% in the early going. But gains quickly faded and turned into notable losses. It’s not good to see strong opens and weak closes, though the indexes finished slightly off session lows.

Here’s the silver lining: The market rally and leading stocks are getting a much-needed shakeout. On Thursday, the Nasdaq and S&P 500 finally dipped below their 10-moving averages, with the latter also coming back below its December highs. The Russell 2000 is nearly back to its 21-day line.

The Dow Jones tested its 50-day line once again, closing just above that key level.

The stock market rally has had five trading days since hitting its high-water mark on Feb. 2. That means a number of stocks have now forged new handles. Thursday’s action helped give some of those handles a bit more depth, shaking out weak holders. A longer, slightly deeper pullback could still be useful, reining in stocks that have resisted the past week’s market pause.

Of course, if you own stocks pulling back, deeper handles aren’t fun at the time. You never know if the stock will simply keep falling.

On Thursday, losers trumped winners by more than 2-to-1, but new highs easily beat new lows.

The market rally has boasted broad-based leadership.

Chips and now software names are starting to pick up, along with various other tech names, including e-commerce plays. The broad auto, travel, housing sectors are all also doing well. In other words, it’s not just Tesla stock, Wynn Resorts (WYNN) and a couple of homebuilders, but GM, Autoliv (ALV), Hilton (HLT), Expedia, Floor & Decor (FND) and more.

Miners and steel plays are consolidating, heavy construction firms and trucking are looking interesting. A number of retailers and medical names are doing well.

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What To Do Now

The market pullback remains normal and healthy, with the biggest concern so far that a slightly bigger retreat might be ideal. Investors can add slightly to their holdings as new stocks flash buy signals. But you could also wait until the market rally revs higher again.

The pullback shows why it’s important to build exposure gradually. If you suddenly ramped up your positions on Feb. 2, you’d likely be faced with some uncomfortable losses.

Still, the market retreat is greatly expanding the stocks setting up new potential entries. So it’s important to regularly update your watchlists, making sure you’re keeping tabs on leaders from a wide variety of groups.

As you build up your exposure, make sure to have a diversity of leadership.

Read The Big Picture every day to stay in sync with the market direction and leading stocks and sectors.

Please follow Ed Carson on Twitter at @IBD_ECarson for stock market updates and more.

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