Dow Jones futures fell sharply early Monday, along with S&P 500 futures and Nasdaq futures, while Treasury yields jumped to long-term high. Stagflation risks are mounting: The odds of a recession grow while the Fed mulls a supersize rate hike this week to confront soaring inflation. Bitcoin tumbled to a 52-week low.
The major indexes sold off hard late last week, tumbling below key levels while recent breakouts failed dramatically. The Nasdaq plunged Friday to close below the low of its May 26 follow-through day, a very bearish signal. The current uptrend already was "under pressure" after Thursday's sell-off.
NetEase, Northrop Grumman, Eli Lilly, Albemarle and Onsemi are all showing relative strength near buy points.
These are worthy for your watchlists, but investors should be wary of any new buys and instead reducing current exposure.
Albemarle, Northrop and LLY stock are on IBD Leaderboard, with ON stock on the Leaderboard watchlist. NTES stock and Eli Lilly are on the IBD 50. The video embedded in this article discussed the market action in detail, while also analyzing NOC stock, Onsemi and Albemarle.
Meanwhile, megacap growth stocks are still showing no leadership. Apple, Microsoft, Google parent Alphabet, Meta Platforms, Amazon.com and Nvidia all suffered serious losses, with GOOGL stock, Amazon and Nvidia all reversing lower from their 10-week lines. Tesla had a relatively modest 1% weekly decline. But TSLA stock closed near weekly lows after hitting resistance at its 21-day line multiple times.
Late Friday, Tesla announced plans to split TSLA stock 3-for-1, subject to shareholder approval at the annual meeting on Aug. 4. The EV giant had signaled plans for another stock split back in March. RBC Capital upgraded Tesla stock Monday morning. But TSLA stock fell 4% before the open amid plunging futures.
Also, Oracle Chairman and co-founder Larry Ellison will not seek reelection to the Tesla board of directors.
Oracle reports Monday night, with Adobe due late Thursday. The software giants will offer some insight into corporate IT spending. But ORCL stock and Adobe are in deep downtrends.
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Dow Jones Futures Today
Dow Jones futures fell 1.8% vs. fair value. S&P 500 futures slumped 2.3% and Nasdaq 100 futures tumbled 2.9%. Futures are signaling the major indexes will open near their May lows.
The 10-year Treasury yield leapt 11 basis points to 3.27%, a new 11-year high. The two-year Treasury yield jumped 13 basis points to 3.21%, the highest since 2007. The key part of the yield curve is nearly inverted after briefly doing so earlier overnight. That underscores market fears of recession and inflation, or stagflation.
U.S. crude oil prices sank more than 1%. Retail gasoline prices have topped $5 a gallon nationwide.
The price of Bitcoin dived below $24,000, the lowest since late 2020. Crypto lender Celsius halted all account withdrawals and transfers, citing "extreme market conditions."
Shanghai and Beijing have reimposed some Covid restrictions amid a limited number of new cases.
Remember that overnight action in Dow futures and elsewhere doesn't necessarily translate into actual trading in the next regular stock market session.
Fed Meeting
The Federal Reserve meets on Tuesday and Wednesday. The Fed will announce its latest rate hike at 2 p.m. ET on Wednesday, followed by a Fed chief Jerome Powell news conference at 2:30 p.m. ET.
Ed Yardeni of Yardeni Research on Sunday raised the risk of a U.S. recession to 45% from 40%. That's after hiking the odds from 30% on May 24.
A big trigger for the stock market sell-off is investor fear that Fed policymakers will have to be much-more aggressive to rein in price pressures, raising the risks of recession.
After Friday's CPI report showed inflation unexpectedly rising to a fresh 40-year high 8.6%, markets are now expecting 50-basis-point moves at the next four Fed meetings, through November.
But there are some calls on Wednesday for the Fed to hike rates by 75 basis points on Wednesday. Markets are pricing in a decent chance of a supersize Fed rate hike.
A surprise would be out of character. Fed chief Powell has tended to telegraph monetary policy moves well in advance. Fed officials have not indicated a three-quarter-point move was likely. In fact, Powell said after the early May meeting that 75 basis points wasn't something that policymakers were "actively considering."
One option would be for the central bank to stick with a half-point rate hike this coming week, but with Fed chief Powell signaling that 75 basis points is on the table for late July.
Join IBD experts as they analyze the market and discuss watchlist-worthy stocks on IBD Live
Stock Market Review
The stock market started off the week within a recent range, but broke below those levels on Thursday with even-bigger losses Friday.
The Dow Jones Industrial Average sank 4.6% in last week's stock market trading. The S&P 500 index skidded 5.1%. The Nasdaq composite plunged 5.6%. The small-cap Russell 2000 gave up 4.5%.
The 10-year Treasury yield leapt 20 basis points to 3.16%, rising to its highest level since late 2018. The 2-year Treasury yield, more closely tied to Fed rate moves, skyrocketed to 3.07%, up 25 basis points on Friday alone. That flattening yield curve underscores stagflation fears.
U.S. crude oil futures rose 1.5% to $120.67 a barrel, its seventh straight weekly gain.
Among the best ETFs, the Innovator IBD 50 ETF tumbled 5.3% last week, while the Innovator IBD Breakout Opportunities ETF retreated 4.4%. The iShares Expanded Tech-Software Sector ETF rolled back 5.9%, with Microsoft, Adobe and ORCL stock all notable holdings. The VanEck Vectors Semiconductor ETF dived 7.4%, with Nvidia stock a big component.
SPDR S&P Metals & Mining ETF melted down 4.45% last week. The Global X U.S. Infrastructure Development ETF reversed 5.6% down. U.S. Global Jets ETF descended 7.2%. SPDR S&P Homebuilders ETF dropped 5.8%. The Energy Select SPDR ETF dipped 0.8% and the Financial Select SPDR ETF plunged 6.8%. The Health Care Select Sector SPDR Fund stepped back 3.3%. LLY stock is a big XLV holding.
Reflecting more-speculative story stocks, ARK Innovation ETF tumbled 7.1% last week and ARK Genomics ETF 8.4%. Tesla stock is still a top holding across the Ark Invest ETFs.
Five Best Chinese Stocks To Watch Now
Stocks To Watch
NetEase stock, along with EV makers BYD and Li Auto, are among the best-looking U.S.-listed Chinese firms, as those names have rallied over the past few weeks on optimism. NTES stock rose 1.8% to 105.65 on Friday. Shares hit 108.77 intraday, briefly breaking above a 107.25 handle buy point as well as key resistance levels just above 108. The mobile gaming giant is in a big consolidation going back to late November or February 2021. The relative strength line for NTES stock is at a 52-week high.
China stocks are rebounding on easing Covid restrictions and internet crackdowns, but that could change quickly. If you're using Chinese stocks as a "safe haven," it's not a good market.
NOC stock fell 3% to 463.82 last week, but found support at its 50-day line on Friday. Shares of the defense giant cleared a 477.36 cup-with-handle buy point on June 3, but fell back below that entry on June 8. Still, the RS line for Northrop stock is at a high.
LLY stock sank 1.5% last week to 297.01, but sank 3.3% on Thursday and 2.1% Friday, closing below its 50-day line. Shares cleared a 314.10 flat-base buy point on May 27, but fell back the following session. The RS line for Eli Lilly stock remains near highs. But Eli Lilly is having to fight hard just to hold support, despite continued bullish data on a likely blockbuster obesity drug.
ALB stock fell 5.5% to 236.87 last week. Shares of the lithium giant are back below an early entry around 248. Albemarle stock now has a handle to go with its cup base, giving it an official buy point of 273.78, according to MarketSmith analysis. Investors might use 259.97, just above Wednesday's high, as a new early entry. At least on a weekly chart, ALB stock seems to be tightening up somewhat. A longer handle would offer more time for moving averages to catch up.
ON stock sank 4.45% to 60.14 last week, finding support Friday at the 21-day line. On a weekly chart, the chipmaker now has a handle with a 67.29 buy point. The top of the handle roughly lines up with a declining-tops trendline from Jan. 5 peak. A longer handle would give some time for moving averages to catch up.
Market Analysis
The stock market started off the week holding within a tight range, with the major indexes continuing to find support at the 21-day moving average. The Russell 2000 and S&P MidCap 400 both moved above their 50-day lines on Tuesday.
On Wednesday, the major indexes had a similar quiet day, but it was a turning point. A number of promising breakouts began failing, often in spectacular fashion. Oceangoing shipping stocks dived, with several other sectors slumping. The Russell 2000 and S&P MidCap fell below their 50-day lines.
The selling in leading stocks continued Thursday, while the key indexes broke below their 21-day lines. The action in the major indexes and leading stocks triggered a move to "uptrend under pressure" after Thursday's action.
On Friday, after the shock CPI inflation report, the major indexes sold off hard again.
The Nasdaq composite closed below the low of its May 26 follow-through day. This is important, because research by Eric Krull shows that when indexes do this, there's a 90% chance that the market will ultimately undercut its lows.
The S&P 500 and Dow closed well below their May 26 lows. Those indexes never staged follow-through days, however. The S&P 500 did mark its worst close in 14 months.
As bad as the major indexes look right now, the action of the leading stocks is even worse.
Energy stocks are the one sector that has held up well in 2022, but LNG plays were big losers this past week. Other would-be leading sectors, including metals, shippers, travel firms and chemical plays have all suffered notable losses.
Growth stocks, with Onsemi a rare exception, are looking terrible right now. It's unclear if AAPL stock, Microsoft or Tesla will be market leaders for some time. It's clear that they aren't market leaders right now.
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What To Do Now
There is a high risk that the major indexes will break below recent lows, triggering a new chapter in the bear market story.
Investors should be reducing exposure. The market action, especially in leading stocks, has been weak. If you have stocks that are working, you can choose to hang on to them. But given the market shift and the fierce, sudden sell-offs in many other top stocks, investors may want to at least consider taking partial profits.
Investors should overhaul their watchlists again. With a lot of chart patterns damaged or broken, focus on stocks with strong relative strength, such as Northrop, Lilly and Albemarle. There may be plenty of time for charts to shape up again.
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