Fed rate hike looms after market rally fizzes; Tesla stock is hitting new lows, as Elon Musk admits

Dow Jones futures changed little overnight along with S&P 500 futures and Nasdaq futures. All eyes await the announcement of the meeting of the Federal Reserve and Fed Chief Jerome Powell. Prospects for rate hikes by the Fed will be key.




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The stock market rally closed slightly higher, but after initially trailing a tame CPI inflation report. Promising moves from leading stocks generally slumped or fell lower.

Tesla (TSLA) plunged to new bear market lows on Tuesday as sentiment turned decidedly bearish for the EV giant. TSLA stock has been sold in large quantities. CEO Elon Musk himself appeared to admit demand for Tesla on Wednesday.

Among the Dow Jones megacap techs, Apple (AAPL) reversed strong early gains after reports of a sweeping change in the App Store model. Microsoft (MSFT) closed higher but after hitting key resistance.

Aviation stocks sold hard as one JetBlue (JBLU) added warning to recent concerns about demand for travel into 2023. United Airlines (UAL), which has flirted with buying outlets in recent weeks, collapsed on Wednesday.

In the meantime, General Electric (GE), Goldman Sachs (GS) and Peabody energy (BTU) have all found support at key levels and are close to possible buying points. Peabody was the IBD stock of the day on Tuesday.

The video embedded in this article discussed Tuesday’s market action and analyzed Tesla stock, GE and Peabody Energy.

Fed Rate Hike, Outlook

The Federal Reserve will almost certainly raise rates by 50 basis points at 2pm ET, following four consecutive 75 basis point rate hikes by the Fed. What investors want are signals on the Fed’s interest rate policy in early 2023.

Following Tuesday’s CPI inflation report, markets are now slightly leaning toward a quarter-point rate hike on February 1.

November’s consumer price index came in lower than expected, with a monthly increase of 0.1%, or 0.2% excluding food and energy. CPI inflation fell to 7.1%, the lowest in a year and lower than October’s 7.7%. Core CPI inflation fell from 6.3% to 6%.

The Fed will also release quarterly economic projections, along with policymakers’ forecasts of rate hikes. That could provide insight into where policymakers see the “terminal” or peak fed funds rate.

Fed Chief Jerome Powell speaks at 2:30 p.m. ET. His comments on inflation and recession risks and peak Fed rates will be critical for stocks and government bonds.

Dow Jones Futures Today

Dow Jones futures were even with fair value. S&P 500 futures changed little and Nasdaq 100 futures rose 0.1%.

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


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


Stock market rally

The stock market rally got off to a strong start on Tuesday, with major indices all clearing short-term highs on the CPI inflation report. But the gains faded significantly.

The Dow Jones Industrial Average closed 0.3% higher during Tuesday trading. The S&P 500 index climbed 0.7%. The Nasdaq composite climbed 1%. The small-cap Russell 2000 gained 0.3%.

Apple shares rose intraday to 149.97, but closed just 0.7% to 145.47. That just recaptured the 50-day line. Apple will open its iPhone and iPad devices to multiple app stores in Europe, Bloomberg reported, to satisfy European regulators. Apple has turned the App Store into a huge moneymaker in recent years.

Microsoft stock rose 1.75% to 256.92 to close above the December 1 high. But the shares were a long way from the morning’s high of 263.92. MSFT shares peaked right at the 200-day line, a key area of ​​resistance.

US crude oil prices shot up 3% to $75.39 a barrel.

The 10-year Treasury yield fell 11 basis points to 3.5%, despite intraday lows of 3.43%. Two-year Treasury yields, which are more closely related to Fed policy, fell 18 basis points to 4.22%.

ETFs

Among the top ETFs, the Innovator IBD 50 ETF (FFTY) was up 0.8%, while the Innovator IBD Breakout Opportunities ETF (BOUT) was up 0.9%. The iShares Expanded Tech-Software Sector ETF (IGV) was up 1.6%, with MSFT stocks a key component. The VanEck Vectors Semiconductor ETF (SMH) gained 1.7%. Reflecting more speculative story stocks, ARK Innovation ETF (ARKK) fell 0.1% and ARK Genomics ETF (ARKG) rose 1.1%. Tesla stock is a major stock in Ark Invest’s ETFs, but especially ARKK.

SPDR S&P Metals & Mining ETF (XME) gained 0.8% and the Global X US Infrastructure Development ETF (PAVE) gained 0.9%. US Global Jets ETF (JETS) fell 2.85%, with UAL shares and JetBlue both components. SPDR S&P Homebuilders ETF (XHB) gained 1.8%, with several builders and home-related retailers showing strength. The Energy Select SPDR ETF (XLE) soared 1.9%. The Financial Select SPDR ETF (XLF) and Health Care Select Sector SPDR Fund (XLV) both rose 0.3%.


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Stocks to watch

GE shares fell 0.4% to 82.88 after crossing the intraday 21-day moving average. General Electric posted a solid run-up Monday from a low of a buy point of 81.40. On a weekly chart, GE stock has found support near the 10-week moving average for the first time since the breakout in early November. A strong jump from these levels, perhaps above Tuesday’s intraday high of 84.90, would present a buying opportunity.

GE’s earnings, while uneven, have recovered in 2022, with even stronger growth next year.

GS shares also recently broke out of a cup-base breakout and found support at the 10-week line, below the buy point of 358.72. The investment bank is recovering this week. According to MarketSmith’s analysis, Goldman stock is operating on a weekly chart on a 13-month cup-with-handle basis with a buy point of 389.68.

On Tuesday, shares rose 1.5% to 368.89, a fraction above the 21-day moving average but outside the intraday highs of 378.56. A move above Tuesday’s high could provide early access to GS shares.

Peabody energy supply

BTU shares rose 2.2% on Tuesday to 28.47, bouncing off the 50-day and 10-week lines but meeting resistance at the 21-day line. Peabody shares have a buy point of 32.99 on a consolidation going back nearly eight months. But BTU stocks, like the general market, tend to move quickly, followed by more gradual withdrawals, relinquishing much of the previous gains. A move above Tuesday’s high of 29.08 could provide early entry from both the 50-day and 21-day lines and could also break the handle downtrend.

Tesla stock

Tesla shares opened higher, but quickly returned gains and then turned sharply lower for a second session in a row. Stocks shot through their November 21 bear market lows, closing 4.1% to 160.95. Volume was at its heaviest in over a year, with several other high-trade pullbacks in recent weeks.

It is possible that some large TSLA stock investors or mutual funds will sell shares as they break lower and as the year ends.

More generally, Tesla stock has lost about half of its value since late September. Sharp sell-off was followed by lukewarm, short bounces.

On Tuesday, data showed that Tesla China’s vehicle registrations were below last week’s forecasts. That adds to concerns about demand in China and comes amid widespread reports that Tesla will slow production at its Shanghai plant and possibly suspend production at the end of the year.

Elon Musk appeared to acknowledge on Tuesday that demand for Tesla is a problem. “Tesla will be great in the long run, but has no control over macro tides,” Musk tweeted.

While a weak global economy is likely a factor, Tesla also faces growing competition, especially in China.

Meanwhile, Elon Musk’s reign on Twitter weighs on Tesla’s stock. His attention seems focused on Twitter versus the EV giant. Meanwhile, Musk’s increasingly partisan, trolling tweets have damaged his brand image, especially with Democrats. The concern for TSLA stock investors is that Elon Musk’s negatives will scare off potential buyers of Tesla EVs.


Tesla vs. BYD: Which EV giant is the better buy?


Analysis of the market rally

The stock market rally erupted at Tuesday’s open on the tame CPI inflation report, but soon gave up much of that gain.

All major indices briefly reached their December 1 intraday highs before pulling back. The S&P 500 closed above its 200-day moving average. The Nasdaq continued to bounce off its 50-day and 21-day lines.

The Russell 2000 opened above 200 days but faded well below that level and finished below the 21 day line.

If the major indices, especially the S&P 500, were to break above their December 1 high, it would be a bullish sign, but not necessarily definitive. The current market rally has produced some large one-day gains, soon followed by pullbacks that erase that action. That made it difficult to buy on strength.

Not surprisingly, many stocks saw big bullish moves during Tuesday’s open, but fell back before small gains or outright losses. Megacaps are neutral at best, like Microsoft stocks, laggards like Apple stocks, or outright losers like Tesla.


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What to do now

Tuesday’s market action shows why investors shouldn’t buy right at the open, especially when major indices don’t follow the news. It also shows why investors should keep their emotions in check.

If the market rebounds strongly after Wednesday’s Fed rate hike and comments from Fed Chief Powell, there will likely be some buying opportunities. But add exposure gradually, using early entries and pullbacks for slightly more secure entries.

Until the market rally shifts from choppy action to sustained uptrend, it is risky to increase exposure.

Many stocks from different sectors are forming. So you want to be prepared and work on your watchlists. Stay engaged so you can act as stocks to clear buy points.

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.

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