Dow Jones futures rose slightly in extended trading, along with S&P 500 futures and Nasdaq futures. The stock market rally reversed to a low on Wednesday after the Federal Reserve pulled back 5.1% from the new peak rate target and Fed Chief Jerome Powell demanded “substantially more evidence” of that inflation is under control.
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But equities pared losses in bullwhip action as investors also weighed other comments from Powell and expected even slower rate hikes to kick off 2023. tesla (TSLA) continued to hit bear market lows amid EV demand concerns. Litter (AAPL) fell below its 50-day moving average.
But solar stocks were strong, with the Invesco Solar ETF (TAN) displaying a buying opportunity, as Emphasis Energy (ENPH), SolarEdge Technologies (SEDG), First Solar (FSLR) and array technologies (ARRY) Everyone stood up.
Fed rate hike, peak rate
The central bank raised the fed funds rate by 50 basis points to 4.25%-4.5% on Wednesday afternoon, as expected. But policymakers, in new quarterly projections, now also see a top rate of 5.1%, up from 4.6% at the Fed’s September meeting. Fed chief Powell has claimed in recent weeks that the peak rate was likely rising. But 5.1% was above market expectations, especially after Tuesday’s relatively tame inflation report.
Fed Chief Powell Hawkish, Dovish
Powell, speaking shortly after the Fed meeting announcement and projections, said the full effects of the Fed’s rate hikes this year have yet to be felt, “but we have more to do.” The Fed chief noted the “welcome reduction” in price gains in the last two CPI reports, but said policymakers need “substantially more evidence to be confident that inflation is on a sustained downward path.”
Powell has not ruled out further cutting interest rates to just a quarter of a point in February. But where the federal funds rate peaks and how long it stays high is more important, he stressed. Notably, Powell does not see any rate cuts in 2023.
But he also said, “Our politics are getting into a really good place right now.”
Markets are pricing in a 73% chance of a quarter point hike in the Fed rate, to a range of 4.5% to 4.75%, from 60% on Tuesday. Notably, investors are expecting another quarter-point rise towards the end of March, but now see a decent chance of no movement.
The Fed continues to see a growth slowdown in 2023, not an actual recession.
Major indexes, all rising modestly ahead of the announcement of the Fed meeting and Powell’s speech, fell in volatile trading. For the second consecutive session, the S&P 500 index moved above the 200-day moving average, but closed below that key level.
Investors should be cautious about adding exposure in today’s market, with indices volatile and close to important levels.
Dow Jones Futures Today
Dow Jones futures were up 0.2% vs. fair value. S&P 500 futures were up 0.3% and Nasdaq 100 futures were up 0.2%.
Keep in mind that overnight action in Dow futures and elsewhere does not necessarily translate to actual trading in the next regular stock market session.
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stock market rally
The stock market rally surged ahead of the Fed meeting announcement, then reversed lower into volatile stock for the remainder of the session.
The Dow Jones Industrial Average was down 0.4% in Wednesday’s stock market trades. The S&P 500 index lost 0.6%. The Nasdaq composite lost 0.8%. The small-cap Russell 2000 was down 0.7%.
Apple shares fell 1.55% to 143.21, below the 50-day moving average.
US crude oil prices rose 2.5% to $77.28 a barrel.
The 10-year Treasury yield closed steady at 3.5%.
Among the top ETFs, the Innovator IBD 50 ETF (FFTY) was down 0.4%, while the Innovator IBD Breakout Opportunities (BOUT) ETF was down 0.1%. The iShares Expanded Tech-Software Sector (IGV) ETF lost 0.2%. The VanEck Vectors Semiconductor ETF (SMH) was down 1.7%.
Reflecting stocks from more speculative stories, the ARK Innovation ETF (ARKK) lost 1% and the ARK Genomics ETF (ARKG) 0.7%. Tesla shares are a major holding in Ark Invest’s ETFs.
The SPDR S&P Metals & Mining ETF (XME) shed 0.9%. SPDR S&P Homebuilders ETF (XHB) was down 0.5%. The Energy Select SPDR ETF (XLE) was down 0.6% and the Financial Select SPDR ETF (XLF) was down 1.25%. The Health Care Select Sector SPDR Fund (XLV) was up 0.2%.
solar actions
The Invesco Solar ETF rose 1.8% to 82.61 on Wednesday. The TAN ETF has an 84.28 cup handle buy point, but traders could have made an early entry from the 21-day moving average.
At the moment, solar stocks are generally rising together, so TAN is a good way to play the industry upside down with less individual stock risk.
Enphase Energy, First Solar and SEDG shares are the top three components, accounting for nearly a third of TAN’s weight.
ENPH shares are now slightly extended from their own handle cup buying point, according to MarketSmith analysis. The SEDG stock is also extended from its handle entry. FSLR stock is breaking out of its 10-week line, offering a new buying opportunity.
Array Technologies is also a TAN component. ARRY shares jumped 8.3% to 23.55, just below a 23.60 handle cup buy point. But the stock is 12.7% above the 21-day line and 26% above the 50-day line, making buying ARRY stock riskier, especially in the current market.
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Tesla stock
Shares of TSLA fell 2.6% to 156.80 on Wednesday. The stock was down 12.4% for the week, continuing to set two-year lows. Tesla shares peaked at 414.46 in November 2021.
On Wednesday, Goldman Sachs lowered its price target for TSLA shares and lowered its fourth-quarter Tesla delivery forecast. Morgan Stanley sees Tesla stock as a top pick for 2023, but warned that “the brakes are slamming on EV demand” overall.
If you covered the TSLA ticker and just looked at the chart, you would simply go for it.
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Market Rally Analysis
The last two days are a great example that it’s not the news, it’s the market’s reaction to the news.
On Tuesday, a cooler-than-expected CPI inflation report sent stocks soaring, but quickly pared gains.
On Wednesday afternoon, the central bank raised its Fed top rate forecast more than expected. Fed chief Powell has made it clear that inflation needs to fall much further, although he has also made more dovish signals. Major indices fell sharply but then pared losses, briefly turning positive before fading out again.
The S&P 500 Index, above its 200-day line for the second straight session, failed to close above that key level, this time reversing lower. But it found support at the 21-day line, which is closing the gap with the 200-day line.
The Dow Jones and Nasdaq also successfully tested their 21-day lines. The Russell 2000, which has become a lagging index, has dropped towards its 50-day line.
Despite the disappointment from Tuesday’s opening highs, the major indexes were up about 1.6% for the week, while the Russell 2000 was up 1%.
The stock market generally has a second-day reaction to Fed meetings, especially with so much flow.
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What to do now
The stock market rally is not giving any reason to increase exposure. Previously, indices would have at least one strong session to attract investors and then cut them off with steady losses in the next few sessions.
But now the major indices can’t hold back a gain.
If you buy hard, there’s a good chance you’re buying the short-term top. If you’re buying into weakness, you might be jumping on a sinking ship.
Better to wait for the major indices to show signs of a sustained market recovery. This would involve the S&P 500 breaking above its 200-day line and then all major indexes topping their Dec. 1 highs. Even in this positive scenario, investors should carefully add exposure.
Read The Big Picture every day to stay in sync with market direction and key stocks and sectors.
Follow Ed Carson on Twitter at @IBD_ECarson for stock market updates and more.
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