Dow Jones futures tilted higher overnight, along with S&P 500 futures and Nasdaq futures. The stock market rally plunged Tuesday on a hotter-than-expected inflation report, with the major indexes breaking below their 50-day moving averages and wiping out all or almost all of their recent gains.
The August consumer price index was much worse than expected. Consumer prices rose 0.1%, vs. views for a 0.1% drop, with food prices and rents pushing up costs despite plunging gasoline prices. The core CPI, which excludes food and energy, popped 0.6%, double what was expected. Headline inflation cooled somewhat again, to 8.3%, but Wall Street expected 8%. Core inflation rose more than forecast, to 6.3%.
That spurred one Wall Street firm to predict that the Federal Reserve will increase rates by a full percentage point at the Sept. 20-21 Fed meeting. That would be the most since the early 1980s, when then-Fed chief Paul Volcker waged all-out war on inflation.
Megacaps Apple (AAPL) and Tesla (TSLA), which had flashed buy signals recently, fell hard on Tuesday, back below key levels. Nvidia (NVDA) and Facebook parent Meta Platforms (META), nobody’s idea of current market leaders, plummeted to 2022 lows.
Dow Jones Futures Today
Dow Jones futures rose 0.2% vs. fair value. S&P 500 futures climbed 0.2%. Nasdaq 100 futures advanced 0.1%.
At 8:30 a.m. ET, the Labor Department will release the August producer price index.
Stock Market Rally
The stock market rally suffered its worst loss of 2022, with the major indexes closing near session lows on the hot inflation report and Fed rate hike fears.
Another factor? The U.S. mulling options for sweeping sanctions vs. China to head off any Taiwan invasion, Reuters reported Tuesday. The European Union is facing pressure to do the same. That would raise the risks of a massive economic decoupling between China and the West.
The Dow Jones Industrial Average tumbled 3.9% in Tuesday’s stock market trading. The S&P 500 index plunged 4.3%. The Nasdaq composite dived 5.2%. The small-cap Russell 2000 lost 3.9%.
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Nvidia stock and META stock plunged more than 9%, both undercutting their 2022 lows.
U.S. crude oil prices dipped 0.5% to $87.31 a barrel.
The 10-year Treasury yield rose 6 basis points to 3.42%. The benchmark yield hit 3.45% intraday, just below the 11-year high of 3.48% set on June 14. Short-term yields rose much more.
Among the best ETFs, the Innovator IBD 50 ETF (FFTY) retreated 2.9%, while the Innovator IBD Breakout Opportunities ETF (BOUT) lost 2.35%. The iShares Expanded Tech-Software Sector ETF (IGV) sank 4.7%. The VanEck Vectors Semiconductor ETF (SMH) plunged nearly 6%. NVDA stock is a major SMH holding.
SPDR S&P Metals & Mining ETF (XME) gave up 3.7%. SPDR S&P Homebuilders ETF (XHB) dived 5.9%. The Energy Select SPDR ETF (XLE) retreated 2.5% and the Financial Select SPDR ETF (XLF) shed 3.75%. The Health Care Select Sector SPDR Fund (XLV) slumped 3.3%.
Stocks Showing Strength
PSTG stock fell 3.8% to 29.64 on Tuesday, but closed above its 21-day line. Pure Storage stock is working on a cup-with-handle base with a 31.62 buy point. Investors could use a move above Monday’s high of 30.88 as a slightly lower entry.
Nio stock edged up 0.9% to 21.95, touching its 200-day line intraday after skyrocketing 13.5% on Monday. Shares of the China EV startup have soared 28% over the last five sessions, four in heavy volume. Analysts are increasingly bullish on Nio’s lineup. Nio begins deliveries of the ET5 sedan, its third new EV this year, on Sept. 30. Nio stock has a 24.53 bottoming base buy point, but investors could use a decisive move above the 200-day line as an early entry.
DVN stock fell 3% to 69.07, pulling back after breaking the trendline of a handle on Monday. The cup-with-handle buy point is 75.37. Investors could now use Monday’s high of 71.57 as an early entry. A longer pause would let the 50-day moving average catch up somewhat.
WOLF stock fell 2.5% to 113.98 on Tuesday after sinking to 111.26 soon after the open. Evercore ISI initiated the chipmaker with an outperform, saying it’s a great way to play the EV space. Investors could treat the recent action as a handle to a huge consolidation, with a 123.35 buy point. A move above Monday’s high could offer an early entry, but Wolfspeed stock is extended, it has greatly outrun some of its moving averages.
ENPH stock dipped 1.1% to 305.50 after testing its 21-day line. Investors could buy Enphase stock now off the 21-day line, though market conditions raise the risks. A longer ENPH stock pause would let a fast-rising 50-day line make up some ground.
Apple stock plunged 5.9%, tumbling back below its 50-day and 200-day lines in heavy volume, giving up the gains from the prior two sessions. AAPL stock had broken a downtrend in a handle on Monday, offering an early entry, but that’s off the table now. Shares of the Dow Jones tech titan are working on a 176.25 buy point from that handle.
Apple iPhone 14 preorders appear to be running as strong or stronger than for the iPhone 13 last year. Actual iPhone 14 sales start Friday.
Tesla stock skidded 4% to 292.13, back slightly below its 200-day line but holding its 21-day and comfortably above its 50-day. Volume was light, but higher than in the five-day rally.
TSLA stock arguably has a short base within a much-larger consolidation, with a 314.74 buy point. A move above Monday’s high of 305.49 could offer an early entry.
Tesla investor relations chief Martin Viecha said at a conference Tuesday that supply-chain constraints and costs are easing for EVs, which should lead to lower prices. Viecha said Tesla would eventually unveil a cheaper EV model, but gave no details on when that might occur. Tesla recently introduced a lower-range Model Y in Europe for a much-cheaper price.
Market Rally Analysis
The recently revived stock market rally ran headlong into the CPI inflation buzz saw on Tuesday. The major indexes and Russell 2000 all tumbled below their 50-day moving averages. The Dow Jones undercut last week’s lows while the S&P 500 nearly did so. The Nasdaq wiped out most of the gains from the prior four sessions.
Leading stocks, many of which had some strong advances in recent days, also suffered Tuesday. Losers trounced winners, following robust market breadth in recent days.
Apple stock showed damaging action Tuesday. Tesla also retreated, following some low-volume gains, but its chart looks a little better.
While Pure Storage and Nio stock still look OK, the odds are that they’ll falter if the market comes under more pressure.
The stock market had rallied over the past several days in no small part on expectations of a tame inflation report. That, in turn, would spur the Fed to start raising rates less aggressively.
But after the hot inflation report, Nomura Securities forecast Fed policymakers will hike rates by 100 basis points on Sept. 21. Late Tuesday, Ed Yardeni of Yardeni Research said a full-percentage point Fed rate hike is “more likely” than 75 basis points.
Markets are fully pricing in at least 75 basis points for a third straight Fed meeting next week. But there’s now a roughly one-third chance of 100 basis points, up from zero before the CPI data. Markets are betting on a higher year-end rate.
The 10-year Treasury yield continued its torrid run over the past several weeks.
A more aggressive Fed, higher Treasury yields and a stronger dollar aren’t a great recipe for stocks. That’s especially so when markets were betting on the opposite.
Now the question is where the market goes from here. Will the major indexes undercut last week’s lows and head toward the June bottom? It’s possible the market will be rangebound as Wall Street waits for actual signs that the Fed will slow rate hikes.
What To Do Now
Investors may have wanted to take profits heading into Tuesday’s CPI inflation report, given the low-volume advance that priced in good news. At this point, you may want to lock in remaining gains in recent buys, or cut losses.
It’s a good idea to keep exposure light. The hot inflation data undermined the short-term bull case of tamer Fed rate hikes, with the market direction now uncertain.
At some point, whether it’s next week, next month or next year, the market will be in a clear uptrend. That’s when the real money will be made.
So work on your watchlists, focusing on relative strength and signs that big institutions are acquiring shares.
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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