Dow Jones futures were up slightly in extended trading, along with S&P 500 futures and Nasdaq futures. The stock market rally turned lower on Wednesday after the Federal Reserve set 5.1% as its new target top interest rate and Fed Chair Jerome Powell called for “much more evidence” that inflation is coming under control.
But stocks pared whiplash losses as investors also considered other Powell comments and hopes for even slower rate hikes early in 2023. Tesla (TSLA) continued to make bear market lows amid concerns over EV demand. Apple (AAPL) fell below its 50-day moving average.
But solar stocks have been strong and the Invesco Solar ETF (TAN) offered a buying opportunity, as Enphase Energy (ENPH), SolarEdge Technologies (SEDG) first sun (FSLR) and array technologies (ARRY) all stood up.
Fed rate hike, top rate
The central bank raised interest rates by 50 basis points to 4.25% to 4.5% on Wednesday afternoon, as expected. But policymakers are now also seeing a top rate of 5.1% in new quarterly guidance, versus 4.6% at the September Fed meeting. Fed Chair Powell has said in recent weeks that the prime interest rate is likely to rise. But 5.1% was above market expectations, especially after Tuesday’s relatively weak inflation report.
Fed Chair Powell Hawkish, Dovish
Powell said shortly after the Fed meeting announcement and forecasts that the full impact of this year’s Fed rate hikes was yet to be felt, “but we still have work to do.” The Fed chair noted the “welcome reduction” in gains in the last two CPI reports, but said policymakers “need a lot more evidence confidence that inflation is on a sustained downward path.”
Powell didn’t rule out a further cut in rate hikes to just a quarter point in February. But where the policy rate peaks and how long it stays high is more important, he stressed. Notably, Powell sees no rate cuts in 2023.
But he also said: “Our politics are coming to a pretty good place now.”
Markets are pricing in a 73% chance of a quarter-point Fed rate hike from 60% on Tuesday to a 4.5% to 4.75% range. Specifically, investors are expecting another quarter-point rise in late March, but now see a good chance of making no move at all.
The Fed continues to see a slowdown in growth for 2023, not an actual recession.
The main indices, all heading moderately ahead of the Fed meeting announcement and Powell’s speech, turned lower in volatile trading. For the second consecutive day, the S&P 500 index moved above the 200-day moving average but closed below that key level.
Investors should be cautious about gaining exposure to the current market as indices are volatile and close to key levels.
Dow Jones futures today
Dow Jones futures rose 0.1% from fair value. S&P 500 futures were up 0.2% and Nasdaq 100 futures were up 0.15%.
Keep in mind that overnight action in Dow futures and elsewhere doesn’t necessarily translate to 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 surged towards the Fed meeting announcement and then reversed in volatile move lower for the remainder of the session.
The Dow Jones Industrial Average fell 0.4% in trading on Wednesday. The S&P 500 index fell 0.6%. The Nasdaq Composite lost 0.8%. Small-cap Russell 2000 lost 0.7%.
Apple shares fell 1.55% to 143.21, back below the 50-day moving average.
US crude prices rose 2.5% to $77.28 a barrel.
The 10-year Treasury yield closed flat at 3.5%.
Among the best ETFs, Innovator IBD 50 ETF (FFTY) fell 0.4%, while Innovator IBD Breakout Opportunities ETF (BOUT) fell 0.1%. The iShares Expanded Tech-Software Sector ETF (IGV) lost 0.2%. The VanEck Vectors Semiconductor ETF (SMH) fell 1.7%.
ARK Innovation ETF (ARKK) is down 1% and ARK Genomics ETF (ARKG) is down 0.7%, reflecting more speculative story stocks. Tesla stock is a key position in Ark Invest’s ETFs.
The SPDR S&P Metals & Mining ETF (XME) is down 0.9%. SPDR S&P Homebuilders ETF (XHB) is down 0.5%. The Energy Select SPDR ETF (XLE) is down 0.6% and the Financial Select SPDR ETF (XLF) is down 1.25%. The Health Care Select Sector SPDR Fund (XLV) edged up 0.2%.
The Invesco Solar ETF was up 1.8% on Wednesday to 82.61. The TAN ETF has a buy point of 84.28 cups with handle, but investors could have made an early entry from the 21-day moving average.
Right now, solar stocks are generally moving higher together, so TAN is a good way to play the sector up with less individual stock risk.
Shares of Enphase Energy, First Solar, and SEDG are the three largest components, accounting for nearly a third of TAN’s weight.
According to MarketSmith analysis, ENPH stock is now slightly extended from its own mug with handle buy point. SEDG bearing is also lengthened from its grip entry. FSLR stock is recovering from its 10-week moving average and presents a fresh buying opportunity.
Array Technologies is also a TAN component. ARRY shares were up 8.3% to 23.55, just below a 23.60 cup with Henkel buy point. But shares are 12.7% above the 21-day moving average and 26% above the 50-day moving average, making it riskier to buy ARRY stock, especially in the current market.
Tesla vs. BYD: Which Booming EV Giant Is the Better Buy?
TSLA shares fell 2.6% to 156.80 on Wednesday. Shares are now down 12.4% for the week and continue to make two-year lows. Tesla stock peaked in November 2021 at 414.46.
On Wednesday, Goldman Sachs lowered its TSLA share price target and lowered its fourth-quarter Tesla delivery forecast. Morgan Stanley sees Tesla stock as a top pick for 2023, but cautioned that “the brakes are squeaking on overall EV demand.”
If you covered up the TSLA ticker and just looked at the chart, you would just move on.
The five best Chinese stocks to watch right now
Analysis of the market rally
The past two days are a great example of how it’s not the news, it’s the market’s reaction to the news.
On Tuesday, a cooler-than-expected CPI inflation report sent stocks higher, but they quickly pared gains.
On Wednesday afternoon, the central bank raised its Fed interest rate forecast more than expected. Fed Chair Powell made it clear that inflation still needs to fall much further, but also gave more dovish signals. The major indices sold off sharply but then turned in losses and briefly turned positive before tailing off.
The S&P 500 index, above its 200-day moving average for the second consecutive day, failed to close above this key level, this time reversing lower. But it found support at the 21-day moving average, which is closing the gap with the 200-day moving average.
The Dow Jones and Nasdaq also successfully tested their 21-day moving average. The Russell 2000, which has become a lagging index, fell back to its 50-day moving average.
Despite the disappointment since Tuesday’s opening highs, the major indices are all up about 1.6% this week, while the Russell 2000 is up 1%.
The stock market often doesn’t react to Fed meetings until the second day, especially with so much movement.
Time the market with IBD’s ETF market strategy
The stock market rally is no reason to increase exposure. Previously, the indices had at least one strong session to attract investors and then chopped them up with steady losses over the next few sessions.
But for now, the major indices can’t hold a profit.
If you buy on strength, there’s a good chance you’re buying right at a short-term high. If you buy on weakness, you might be jumping on a sinking ship.
It is better to wait for the major indices to show signs of a sustained market rally. That would mean the S&P 500 crosses its 200-day moving average and then all major indices crack their December 1 highs. Even in this positive scenario, investors should carefully increase their exposure.
Read The Big Picture every day to keep up to date with 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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