Dow Jones futures edged lower early Monday morning, while S&P 500 futures and Nasdaq futures rose. The stock market rally came under pressure last week, as Treasury yields soared to their highest level since the coronavirus pandemic began.
The new year started off with a solid rally on Monday, led by Tesla (TSLA), Advanced Micro Devices (AMD), Nvidia (NVDA) and Apple (AAPL). But the rest of the week was an expectation breaker, with the major indexes selling off and leaders such as Tesla stock reversing hard.
Surging Treasury yields were the driving force, as a surprisingly hawkish Fed jobs report on Friday spurred selling in bonds. That slammed growth stock names and buoyed financials. Rising crude oil prices lifted energy stocks.
But the overall trend was negative. The stock market rally is an uptrend under pressure. Investors should recalibrate their expectations and respond accordingly.
Tesla, AMD and Nvidia stock are in IBD Leaderboard. The video embedded in this article discussed the major indexes and sector moves in detail, while also analyzing Tesla stock, Hilton Worldwide (HLT) and Cheniere Energy (LNG).
Late Friday, Tesla CEO Elon Musk said his company would raise the price of Full Self-Driving in the U.S. by $2,000, to $12,000, on Jan. 17. He also said FSD Beta 10.9 will be released soon.
Dow Jones Futures Today
Dow Jones futures were just below fair value. S&P 500 futures climbed slightly and Nasdaq 100 futures rose 0.3%.
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
Coronavirus cases worldwide reached 307.89 million. Covid-19 deaths topped 5.5 million.
Coronavirus cases in the U.S. have hit 61.26 million, with deaths above 859,000.
New coronavirus cases are well above 2 million a day worldwide, with the U.S. easily breaking daily records. Hospitalizations have risen, but ICU beds generally remain available, as omicron has been milder than previous Covid variants.
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Stock Market Rally
The stock market rally started the week off with solid gains but then quickly deteriorated.
The Dow Jones Industrial Average dipped 0.3% in last week’s stock market trading, as blue-chip financials, energy firms and Caterpillar (CAT) offset losses in other sectors. The S&P 500 index retreated 1.9%. The Nasdaq composite sold off 4.5%, its worst weekly loss since last February. The small-cap Russell 2000 gave up 2.9%.
The 10-year Treasury yield skyrocketed 26 basis points to 1.77%, hitting its highest levels since January 2020. U.S. crude oil futures rose about 5% for the week to $78.90 a barrel after topping $80 late in the week intraday.
Among the best ETFs, the Innovator IBD 50 ETF (FFTY) plunged 8.6% last week, while the Innovator IBD Breakout Opportunities ETF (BOUT) gave up 3.8%. The iShares Expanded Tech-Software Sector ETF (IGV) dived 8.8%. The VanEck Vectors Semiconductor ETF (SMH) slid 3.85%, with AMD stock and Nvidia major components.
SPDR S&P Metals & Mining ETF (XME) rose 2.9% last week. The Global X U.S. Infrastructure Development ETF (PAVE) fell 1.5%. U.S. Global Jets ETF (JETS) ascended 5.3%. SPDR S&P Homebuilders ETF (XHB) tumbled 7.1% as soaring interest rates took a toll. The Energy Select SPDR ETF (XLE) spiked 10.5% and the Financial Select SPDR ETF (XLF) added 5.4%. The Health Care Select Sector SPDR Fund (XLV) slumped 4.6%.
Reflecting more-speculative story stocks, ARK Innovation ETF (ARKK) dived 10.75% last week and ARK Genomics ETF (ARKG) 11.4%, both skidding to their lowest levels in more than a year. Tesla stock remains the top holding across ARK Invest’s ETFs, though Cathie Woods has slashed her holdings in the EV giant in recent months.
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Market Rally Analysis
The stock market rally started 2022 in a hurry and then fell on its face, with growth stocks leading broad-based losses. The Nasdaq did hold its December lows, barely. The S&P 500 is holding its 50-day line, for now. The small-cap Russell 2000, which finally got above its 200-day line on Jan. 4, retreated back below that key level. That reflects market breadth weakening again after a brief recovery at the end of 2021.
A New Year hangover after a Santa Claus rally isn’t especially surprising. Big institutions can quickly upend the light-volume price moves around the holidays, while tax selling can often spur losses in the prior year’s winners.
But, without looking at a calendar, the stock market rally and many leaders had an expectation-breaking week. On Monday, the Nasdaq was setting up for a move toward record highs. Tesla had broken out powerfully. AMD stock and Nvidia once again rebounded from their 50-day/10-week lines. Apple stock hit a $3 trillion market cap intraday.
A few days later, and the Nasdaq was flirting with its December lows, marking its worst close since mid-October. Tesla stock crashed back below its buy point and its 50-day line, suffering a 2.8% weekly loss despite Monday’s 13.5% gain.
AMD and Nvidia stock reversed back through their 50-day lines again and back to their December lows. Apple stock didn’t fare too badly, down 3%, but still ended below its 21-day line for the first time in months.
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More Than Just Growth
It wasn’t just growth stocks with eye-watering valuations that suffered. Medical stocks, which had been broadly robust in late 2021, have stumbled badly to start the new year. Homebuilders, perhaps not surprisingly, have cracked as Treasury yields surged.
Trucking firms, which were an elite group, tumbled this past week, with group leader ArcBest (ARCB) hardest hit. Other shipping groups held up well though.
On the upside, the financial and energy sectors had big weeks. As long as Treasury yields and crude oil prices remain strong, those stocks should fare well. But it wouldn’t be surprising to see yields and oil prices take a breather or retrace some recent gains.
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What To Do Now
When the market breaks expectations, you can’t stick with the old script. The stock market is not yet in a correction, but the uptrend is under increasing pressure. Growth names arguably have been in a correction for months. With Tesla struggling and many other megacaps aside from Apple testing or undercutting recent lows, that’s becoming more obvious.
Investors should be defensive. Even if you add some new positions in hot sectors, you probably should be reducing exposure. It’s not a good time to be holding growth stocks, aside from core positions in long-term winners.
Making money in a divided, weakening market is exceedingly difficult. It’s far easier to make big gains, with lower risk, in a solid, broad market rally.
Eve Boboch, co-author of The Lifecycle Trade, stressed on Friday’s IBD Live the importance of “preserving your mental capital.” Don’t fight a losing battle only to turn gun shy when conditions are favorable.
Right now is the time to be building up your watchlists. Look for stocks with strong relative strength, finding support at key levels or even holding near buy points. Look for those potential mega-winners, but cast a wide net. It’s unclear which sectors will lead the market higher in 2022, so let the charts guide you.
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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