Dow Jones futures open Sunday night, along with S&P 500 futures and Nasdaq futures, with a focus on the CPI inflation report and the Federal Reserve.
The stock market rally pulled back last week, with major indices continuing their trend of rising to new highs, but then fading again. It is a challenging environment to buy stocks.
This week, investors are getting a one-two punch with major economic news. On Tuesday, the Labor Department will publish its November CPI inflation report. On Wednesday afternoon, the Federal Reserve will raise rates again, with Fed Chief Jerome Powell signaling further tightening in early 2023.
That could be a catalyst for large market gains or losses, or jerky sideways moves to continue. Investors should probably wait for the inflation report and Fed news before adding exposure.
Breakout failures or fizzles are rife, with DXCM shares falling back on Friday after briefly clearing a buy point on Thursday following FDA approval.
But here are five stocks to watch: Dow Jones giants Caterpillar (CAT) and Goldman Sachs (GS), Sanmina (SANM), McKesson (MCK) and MercadoLibre (MELI). To be clear, none of these stocks are usable, MELI stocks in particular need some work.
Microsoft (MSFT) is doing relatively well for the megacaps, with Apple (AAPL) below the 50-day line and Tesla (TSLA) trying to prevent new lows in the bear market. But MSFT shares remain well below the 200-day line and have not made much progress over the past month.
The video embedded in the article thoroughly discussed and analyzed the market action Dexcom (DXCM), MercadoLibre and CAT shares.
CPI inflation and Fed meeting
On Tuesday morning, the Labor Department will publish the November consumer price index. Headline and core CPI inflation should cool in the coming months, if only as comparisons get tougher. But service prices have been stubbornly strong.
The Federal Reserve wants a more substantial decline in services inflation and wage increases before ending interest rate hikes. At 2pm ET, the Fed is expected to raise its Fed Funds rate by 50 basis points to 4.25%-4.5%, ending a streak of four 75 basis point hikes. Investors will want some clues about the February meeting and how high Fed Funds rates may ultimately rise. Markets are currently pricing in another half-point rate hike by the Fed in February, although there is a good chance of a quarter-point move.
Fed Chief Powell’s comments at 2:30 p.m. ET, along with the CPI inflation report, could set the tone for Fed policy heading into 2023.
Powell and several policymakers have indicated that a recession may be necessary to bring inflation under control.
Dow Jones Futures Today
Dow Jones futures open at 6 p.m. ET on Sunday, along with S&P 500 futures and Nasdaq 100 futures.
Stock market rally
The stock market rally over the past week caused a significant drop for the major indices.
The Dow Jones Industrial Average fell 2.8% last week trading on the stock exchange. The S&P 500 index lost 3.4%. The Nasdaq composite fell 4%. The small-cap Russell 2000 plunged 5.1%.
The 10-year Treasury yield rose 6 basis points to 3.57%, after a 3.4% recovery mid-week.
US crude oil futures fell 11% last week to $71.02 a barrel, while gasoline futures plunged 9.8%. Both reached the low point of 2022. The price of natural gas fell by 0.6%.
SPDR S&P Metals & Mining ETF (XME) gave up 6.4% last week. The Global X US Infrastructure Development ETF (PAVE) fell by 2.85%. US Global Jets ETF (JETS) decreased by 3.3%. SPDR S&P Homebuilders ETF (XHB) decreased by 2%. The Energy Select SPDR ETF (XLE) plunged 8.45%, definitively breaking the 50-day mark. The Financial Select SPDR ETF (XLF) retreated 3.9%. The Care Select Sector SPDR Fund (XLV) fell 1.3% after rising in eight of the previous nine weeks.
Apple shares fell 3.8% last week, tumbling below that key level on Tuesday and meeting resistance there on Friday. Bad news about iPhone production can be priced in and AAPL stocks recover.
Fellow Dow tech titan Microsoft shares also fell 3.8% but held support at the 21-day line, modestly above a just 50-day gain. But it’s well below the 200-day mark. MSFT stocks are essentially flat from a month ago, as are the S&P 500 and Nasdaq.
Tesla shares fell 8.1% over the past week, even with Friday’s 3.2% pop. TSLA stock is jumping above recent bear market lows. Tesla announced new China stimulus last week with widespread media reports that the Shanghai plant will cut production significantly in the coming weeks, even halting Model Y production.
Stocks to watch
Shares of Caterpillar fell 3.7% last week to 227.29, undermining the 21-day line. The retreat could result in a constructive shakeout. CAT stock has a buy point at 238 or 239.95 from a long cup base. In a week, the heavy equipment giant Dow would be a flat base with that 239.95 buy point. A slightly longer pause would allow the fast-rising 50-day trend to narrow the gap to CAT stocks.
Goldman shares fell 5.6% last week to 359.14, signaling a breakout of a cup base with a buy point of 358.72, before rising slightly above it. A solid bounce from here could provide a new entry, especially if the 50-day or 10-week line catches up. On a weekly chart, GS stock has a maturity of 13 months cup-with-handle basewith a buy point of 389.68, according to MarketSmith Analysis. Over the past week, more depth has now emerged on that handle, which could also become a flat base in a week.
Sanmina shares fell 7.3% to 62.48 last week. SANM stock was solidly consolidating in the profit-taking zone after an October breakout from a cup base. Stocks could begin a pullback to the 50-day/10-week line, presenting a buying opportunity, though the weekly drop was abrupt. SANM stock is also working on a possible flat base.
McKesson shares fell 4% to 371.37 last week, falling just below the 50-day, 10-week lines on Friday. MCK stock is working for another consolidation after a sharp sell-off on Nov. 10-11 that brought down many defensive medical stocks. A move above the December 2 high of 389.45 could provide early access, still close to moving averages.
The MELI share fell 5.1% to 896.48, its fourth straight weekly drop. The Latin American e-commerce and payments giant has a buy point of 1,095.44, with a trendline of around 1,025. An aggressive entry could be a decisive recapture of MELI stock moving averages, triggering the December 2 high of 957. While MercadoLibre stock is on a downward trend, weekly losses come from lighter volume with some relatively strong positive closes.
Analysis of the market rally
A week ago, the stock market rally reached new highs, with the S&P 500 above the 200-day mark for the first time in months. But as investors reevaluated the jobs report and comments from Fed chief Powell, major indices retreated.
The S&P 500 fell below the 200-day line, while the Nasdaq tested its 50-day line. Both hit resistance on the 21-day line late in the week. The Russell 2000 tumbled below its 200-day and 21-day lines and came back to its 50-day mark, just below its 10-week line.
The rally-leading Dow holds support around its 21-day mark.
The S&P 500 is actually at what it was after Nov. 10, when a subdued October CPI inflation report supported the stock. The Nasdaq and Russell 2000 are back to early November levels, but also to late October highs.
If you had to design a scenario to lure investors in to get confused repeatedly, this current uptrend could be the blueprint: a market rally of a few big one-day gains followed by pullbacks over several sessions.
It is still a confirmed market rally. However, further losses, such as the Nasdaq or especially the S&P 500 clearly breaking their 50-day lines, would be of concern.
Tuesday’s November CPI inflation report and Wednesday’s Fed meeting announcement and Powell’s comments could be a catalyst for a sustained market rally or a decisive sell-off. But they can also trigger another big market pop that seems decisive, only to be followed by yet another pullback.
What to do now
Investors should be wary of adding exposure until the CPI inflation report and Fed meeting are in the rearview mirror. Even as markets rush inflation data and Fed Chief Powell’s comments, investors should be selective about new purchases, in case major indices simply fall back in the coming sessions.
At some point, there will be a sustained, steady market rally. When that happens, there are plenty of buying opportunities.
So make sure you have your shopping list ready for the stock market holiday. A large number of stocks from different sectors are forming or about to do so.
Read The big picture every day to stay in sync with market direction and leading stocks and sectors.
Follow Ed Carson on Twitter at @IBD_ECarson for stock market updates and more.
YOU ALSO LIKE: