Dow Jones futures pare losses Friday morning, along with S&P 500 futures and Nasdaq futures, as Treasury yields pulled back slightly. The stock market rally sold off Thursday as Treasury yields soared on a hot inflation report and expectations of an even-more aggressive Federal Reserve.
Despite the broad weakness, Datadog gapped above its 50-day line Thursday on blowout earnings. DDOG stock, one of the last highly valued software stocks to crack, could be among the first to fully recover. But Affirm crashed Thursday afternoon, after the "buy now, pay later" leader reported mixed results amid soaring expenses.
Nutrien, Blackstone, Eagle Bulk Shipping and BHP Group flashed buy signals Thursday. Nutrien and BHP report earnings next week, however, making them riskier to buy now.
Notable Earnings
Expedia, Textainer Group and Cloudflare, reported earnings after the close Thursday.
EXPE stock rose solidly overnight on strong earnings. Textainer stock fell modestly on mixed results. EXPE and TGH stock had closed in buy range.
NET stock rose modestly early Friday on strong revenue guidance after the software maker reported in-line earnings. Cloudflare closed up 1%, after initially reclaiming its 50-day line and testing its 200-day line intraday.
EXPE stock is on IBD Leaderboard as an earnings option play. BHP stock is on the IBD 50.
The video embedded in this article discussed Thursday's market action and analyzed three stocks: Datadog, Blackstone and NTR stock.
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Yields Soar On Hot Inflation, Aggressive Fed
The January consumer price index shot up 7.5% vs. a year earlier, the hottest inflation rate since February 1982. Core inflation rose to 6%. Both increased more than expected.
That raised expectations for bigger, faster Fed rate hikes, with investors now almost fully pricing in a half-point rate increase at the March 15-16 meeting.
St. Louis Fed President James Bullard said the January inflation data made him "dramatically" more hawkish. Bullard, a voting FOMC policymaker this year, now favors a 50-point hike in March, a big shift in less than two weeks. He wants a cumulative increase of 100 basis points by July 1. But the market is pricing in more, suggesting decent odds of at least two half-point Fed rate hikes in the next three meetings.
It's possible the Fed could raise interest rates at every meeting in 2022.
The 10-year Treasury yield shot up 10 basis points to 2.03%, crossing the 2% level for the first time in 30 months. The two-year Treasury yield, more sensitive to Fed rate hikes, skyrocketed 21 basis points to 1.56%. The spread between short-term and long-term Treasury yield has narrowed considerably in the past few months.
Dow Jones Futures Today
Dow Jones futures fell 0.1% vs. fair value. S&P 500 futures gave up 0.1% and Nasdaq 100 futures lost a fraction. Futures are off morning lows, amid reports that some Fed officials were pushing back on Bullard's hawkish comments.
The 10-year Treasury yield fell 2 basis points to 2.01%. The two-year Treasury yield was flat at 1.56% after topping 1.6% earlier this morning.
U.S. crude oil prices rose more than 1%. Copper futures fell 2%.
Remember that overnight action in Dow futures and elsewhere doesn't necessarily translate into actual trading in the next regular stock market session.
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Stock Market Rally
The stock market rally retreated as Treasury yields spiked on the hot consumer price index report. A morning rebound quickly reversed on Bullard's Fed rate hike comments. Stocks closed down sharply, though slightly off session lows.
The Dow Jones Industrial Average slumped 1.5% in Thursday's stock market trading. The S&P 500 index gave up 1.8%. The Nasdaq composite skidded 2.1%. The Nasdaq 100 slumped 2.3%, as Apple, Microsoft and Google parent Alphabet retreated, along with many other big-cap techs. The small-cap Russell 2000 reversed lower, losing 1.5%.
U.S. crude oil prices rose 0.3% to $89.88 a barrel, slashing intraday gains.
Among the best ETFs, the Innovator IBD 50 ETF slumped 2.1%, while the Innovator IBD Breakout Opportunities ETF edged up 0.1%. The iShares Expanded Tech-Software Sector ETF gave up 1.6%, with DDOG stock a component. The VanEck Vectors Semiconductor ETF tumbled 3%.
SPDR S&P Metals & Mining ETF dipped 0.1%, reversing from strong gains. Global X U.S. Infrastructure Development ETF retreated 1.7%. U.S. Global Jets ETF lost 1 cent. SPDR S&P Homebuilders ETF skidded 3.6%. The Energy Select SPDR ETF faded for a 0.6% loss and the Financial Select SPDR ETF gave up 0.9%. The Health Care Select Sector SPDR Fund fell 1.6%
Reflecting more-speculative story stocks, ARK Innovation ETF fell 3.1% and ARK Genomics ETF 2.9%, both reversing from strong intraday gains.
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Datadog Stock
Datadog shot up 12% to 174.51 on Thursday after fourth-quarter earnings leapt 233% and revenue 84%, with growth accelerating for a third straight quarter on the top and bottom lines. DDOG stock gapped above its 50-day line, hitting 184.70 intraday, close to its December peak.
In early January, DDOG stock finally cracked, well after many other highly valued software stocks were already tumbling. Shares found support at their 200-day line and were starting to recover heading into earnings.
The relative strength line hit a record high Thursday, a remarkable recovery and a bullish signal.
DDOG stock now has a consolidation pattern with a 199.78 buy point. But, ideally, DDOG stock will pause, forming a handle around current levels.
But it's also possible that Datadog stock could give up much of its earnings gap-up, especially if the market fades. A rising rate environment is difficult for highly valued stocks, and Datadog's price-earnings ratio is well into the triple digits.
Affirm Stock
AFRM stock rose intraday to nearly its 50-day line, but then cratered after tweeting out fiscal Q2 earnings prematurely. The Q2 loss was wider than expected. Revenue growth of 77% was solid, but operating expenses surged 141%. Affirm also guided low on Q3 revenue.
Affirm stock dived 21% on Thursday to 58.82. Shares tumbled to 50 at the day's low, nearly undercutting the late January lows. AFRM stock hit a record 176.65 in early November.
Shares continued to sell off early Friday.
The Affirm results and AFRM stock sell-off triggered losses in Square parent Block and PayPal, as well as growth stocks generally.
Market Rally Analysis
The stock market rally retreated Thursday from key levels, with the hot inflation report, surging Treasury yields and accelerating Fed rate hike plans the specific causes.
The S&P 500 and Nasdaq sank back below their 21-day moving averages. Both are still within their recent range from the past several days, with the S&P 500 also bounded by the 50-day and 200-day lines.
The Dow Jones fell back below its 50-day. The Russell 2000, which was working toward its 50-day line, reversed lower.
Even when the Nasdaq was briefly positive, Apple, Microsoft and Google stock were down. Apple stock closed off 2.4% while Microsoft and Google lost more than 2%. These three megacaps are still in decent shape.
Beaten-down stocks led the charge for growth on Wednesday and for a while on Thursday. Datadog stock looks better than most. But most have a lot of work to do and could hit overhead supply along the way. AFRM stock was a dramatic example of how rebound plays can quickly reverse.
Betting on triple-digit P-E stocks to outperform over time as interest rates soar seems dubious. Ultimately, high P-E stocks reversed lower overall Thursday, as reflected in ARKK and similar ETFs.
For now, there are few growth plays flashing buy signals.
Fertilizer, energy and mining continue to act well, along with ocean-going shipping stocks and many financials. Nutrien, BHP, Eagle Bulk Shipping and BX stock underscore the strength in these sectors.
It wouldn't be bad for the major indexes to move sideways for a few days or weeks, letting more bases form. But ultimately, the market rally will break to the upside or downside.
Moving below last week's lows would be a bad sign. It would put into play the lows of the Jan. 31 follow-through-day. The S&P 500 is not that far from undercutting those lows, as well as its 200-day line.
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What To Do Now
Thursday's action showed why investors should be disciplined. The market rally had started to show some positive signals as of Wednesday, but was right at key resistance ahead of the CPI inflation report. Perhaps the market rally will shrug off the hot inflation reading and hawkish Fed and quickly break higher. But it wouldn't take much to spur a break lower.
For now, investors should keep exposure light, especially in growth. Consider taking at least partial profits quickly in the current market, and be ready to slash positions if they aren't working.
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