Dow Jones falls nearly 700 points, S&P 500 nears key support; Here’s what to do now

Dow Jones futures rose slightly after hours, along with S&P 500 futures and Nasdaq futures. Palo Alto Networks and Coinbase reported late Tuesday, with Wingstop and chip giant Nvidia on Wednesday.




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The stock rally lost more ground, with the Dow Jones breaking below a key level while the S&P 500 and Nasdaq retreated against major support. The 10-year Treasury yield continued to surge higher, approaching the 4% level again amid stronger-than-expected economic data as well as disappointing Home Depot (HD) guidance.

Investors should adopt a more defensive stance at least in the short term.

Palo Alto Networks (PANW) and Toll Brothers (TOL) reported earnings late Tuesday. So did three large Ark Invest holdings: Exact Sciences (EXAS), Crispr Therapeutics (CRSP) and Coin base (COIN).

Wing stop (WING), TJX Cos. (TJX) and Baidu (BIDU) report early Wednesday. Wingstop fell back below a buy point Tuesday, while TJX stock isn’t too far off an early entry into a shallow base.

Nvidia ( NVDA ) earnings are approaching Wednesday night, a key report for the chip sector and the overall market recovery.

The WING share is on the IBD Leaderboard and the IBD 50.

The video embedded in the article reviews Tuesday’s market sales and analysis Car life (ALV), Lamb Weston and Wingstop.

Dow Jones Futures today

Dow Jones futures rose 0.2% relative to fair value. S&P 500 futures rose 0.25% and Nasdaq 100 futures rose 0.4%.

Keep in mind that overnight action in Dow futures and elsewhere does not necessarily translate into actual trading in the next regular session.

Key income

PANW stock jumped in late trading after Palo Alto earnings topped fiscal Q2 views, but guidance was mixed. Palo Alto shares fell 1.4% to 166.89 on Tuesday, pulling back toward the 200-day line. A decisive move above last week’s high of 177.60 would remove resistance back several months, offering an entry.

TOL shares rose modestly after hours as first-quarter earnings topped views. Toll Brothers shares retreated 2.6% Tuesday to 55.70, nearing the 50-day and 10-week lines. After nearly doubling from October last year to February 2, shares have retreated as government yields have rebounded. But TOL stock has a buy point at 62.71 cup with handle.

EXAS stock fell modestly in overnight trading after Exact Sciences topped Q4 views but gave in-line guidance for 2023. Exact Sciences stock was able to test the 50-day line on Wednesday after falling 3.5% to 61.26 on Tuesday.

CRSP shares rose slightly in extended action. Crispr reported a smaller-than-expected Q4 loss and said it is on track to complete the FDA filing by the end of Q1 for its gene-edited therapy to treat sickle cell disease and transfusion-dependent beta-thalassemia. Crispr shares fell 4.8% on Tuesday to 62.07, falling below the 50-day mark.

COIN stock fell overnight as Coinbase reported a slightly smaller-than-expected fourth-quarter loss, as revenue fell 75%. COIN stock fell 8.4% to 46.63 on Tuesday, back against the 200-day and 21-day lines. Investors may see a decisive pullback from these levels as an aggressive entry of sorts.

WING shares fell 4.2% to 166.21 on heavy volume on Tuesday, skidding below a 169.04 cup-with-handle buy point cleared last week, according to MarketSmith analysis.

TJX shares retreated 1.3% to 78.82, slightly below the 50-day line in a 6% deep flat base. The official buy point is 83.23, but a strong move above the 50-day line would also break a trendline entry.

BIDU shares fell 0.6% on Tuesday to 140.82, below the 21-day line but above the 50-day line.

Nvidia shares fell 3.4% to 206.55 on Tuesday, just below the 21-day line. Microsoft (MSFT) announced that its Xbox games will be on Nvidia’s cloud gaming service. NVDA stock has extended from a bottom base, but has a three-week tight pattern with a buy point at 230.59. By Wednesday’s close, the chip giant is likely to be in control on a daily chart with the same entry, for a consolidation back to April. But Nvidia stock will still be extended from the 50-day/10-week lines.


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


Stock market rally

The stock market rally opened lower on Tuesday, with selling soon accelerating on S&P Global’s flash reading of the US economy, with the composite index and the services gauge both moving above the break-even 50 level.

The Dow Jones Industrial Average fell 2.1% in Tuesday’s trading. The S&P 500 index gave up 2%. The Nasdaq composite fell 2.5 percent. The small-cap Russell 2000 fell 2.9%.

U.S. crude fell 0.2% to $76.16 a barrel, extending last week’s sharp losses. Natural gas futures plunged 8.9% on Tuesday and 19% over the past four sessions.

Copper prices rose 2.9 per cent.

The 10-year government yield rose 13 basis points to 3.95%. It is the highest since November and up 62 basis points from the February 2 low. Some of this reflects optimism that the US will not fall into recession. But it also means that inflation is likely to be more persistent and that the Fed may lean towards being more aggressive. Markets now see at least an 80% chance of another three quarter-point rate hikes, with a small but increasing chance of a half-point move in March or May.

On Wednesday, the Fed will release minutes from January 31-Feb. 1 meeting. On Friday, investors will get the January reading for the PCE price index, the Fed’s favorite inflation gauge.

ETFs

Among growth ETFs, the Innovator IBD 50 ETF (FFTY) returned 2.2%. The iShares Expanded Tech-Software Sector ETF ( IGV ) retreated 2%. The VanEck Vectors Semiconductor ETF (SMH) fell back 3%. Nvidia stock is a great SMH holding.

Reflecting stocks with more speculative stories, ARK Innovation ETF ( ARKK ) fell 6.1% and ARK Genomics ( ARKG ) fell 6.25%. CRSP shares and Coinbase are two major holdings at Ark Invest.

The SPDR S&P Metals & Mining ETF ( XME ) lost 2.6%. The US Global Jets ETF (JETS) fell 3%.

The SPDR S&P Homebuilders ETF ( XHB ) sold off 3.9% as Home Depot’s guidance and rising interest rates hammered home-related stocks. The TOL share is an XHB holding.

The Energy Select SPDR ETF (XLE) and the Financial Select SPDR ETF (XLF) each retreated 2.1%. The Health Care Select Sector SPDR Fund ( XLV ) was down 1.3%.


Top five Chinese stocks to watch now


Market rally analysis

The stock market rally extended the pullback on Tuesday. The S&P 500, Nasdaq and Russell 2000 all fell sharply, below their 21-day moving averages. The Dow Jones decisively fell below its 50-day line after holding that key level for a month.

As of now, the pullback in the market still looks normal on a weekly chart, but it’s a bit like saying a person’s blood pressure is “normal” but coming towards the upper limit.

The S&P 500 and Nasdaq are falling near their 50-day and 200-day lines, respectively. Breaking these levels would be worrisome.

Recent breakouts and buy signals have struggled, with the overall market fading since February 2 and especially in the past three sessions.

Rising government interest rates and a returning dollar are weighing on share prices, especially growth names. With some short-term returns topping 5%, that’s a pretty decent risk-free return relative to stocks.

More broadly, the market rally is no longer shrugging off mixed (at best) earnings, guidance and financial data.

The good news is that investors no longer seem so complacent. The Cboe Volatility Index, or VIX, has jumped to its highest level since early January, just ahead of the January 6 follow-up day.

Speculative growth names, which flourished from market lows in January, may not continue to lead to the upside if their actual earnings don’t match.

Some mining stocks showed strength as copper and other metal prices rebounded. But will it last more than a day?

More defensive names stand out again. Lamb Weston (LW) hovers around a buy point while Hershey (HSY) flirted with a breakout Tuesday. Walmart (WMT) gave a buy signal on earnings despite weak guidance.


Time the market with IBD’s ETF market strategy


What to do now

Investors should become more defensive, perhaps hedging the total exposure. Even if it’s not your explicit goal, you should trim your exposure by cutting individual losers or taking at least partial gains in some winners.

The recent decline may still be positive. Stocks that resisted the initial mild decline in early February are now taking a breather or falling back. A few good days can easily revive the fortunes of the market rally and trigger a series of buying opportunities. So investors should be ready to act and build their watch lists.

But if conditions worsen, you need to go back more. So be flexible and stay engaged.

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 exchange updates and more.

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