Dow Jones Futures: Inflation Report, Federal Reserve Are Big Tests For Market Rally

Dow Jones futures will open on Sunday evening along with S&P 500 futures and Nasdaq futures, with the focus on the CPI inflation report and the Federal Reserve.




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The stock market rally retreated last week with the major indices continuing their trend of popping new highs but then fading back. It’s a challenging environment to buy stocks.

Investors will get a shot or two of big economic news this coming week. On Tuesday, the Labor Department will release its November CPI inflation report. On Wednesday afternoon, the Federal Reserve will raise rates again, with Fed chief Jerome Powell offering hints of further tightening in early 2023.

This could be a catalyst for large market gains or losses, or volatile sideways action could continue. Investors should wait for the inflation report and Fed news before adding exposure.

Breakout failures or fizzles are widespread, with DXCM stock plunging on Friday after briefly clearing a buy point on Thursday over FDA approval.

But here are five stocks to watch: Dow Jones Giants Kamla (CAT) and Goldman Sachs (GS), Sanmina (SANM), McKesson (MCK) and MercadoLibre (Melee). To be clear, none of these stocks are actionable, with MELI stock in particular needing some work.

Microsoft (MSFT) is performing relatively well for megacaps Apple (AAPL) below its 50-day line and Tesla (TSLA) is trying to avoid setting new bear market lows. But MSFT stock remains well below its 200-day line and hasn’t made much progress in the past one month.

Videos embedded in the article provide in-depth reviews and analysis of market action Dexcom (DXCM), MercadoLibre and CAT stock.


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CPI inflation and Fed meeting

Early Tuesday, the Labor Department will release the Consumer Price Index for November. Overall and core CPI inflation should calm down over the next several months, if only because comparisons are getting tougher. But the prices of services have remained stubbornly strong.

The Federal Reserve wants to see a more-substantial decline in services inflation as well as wage gains before stopping rate hikes. At 2 p.m. ET, the Fed is expected to raise its fed funds rate by 50 basis points to 4.25%-4.5%, ending a series of four 75-basis-point increases. Investors are looking for some clues about the February meeting, and how high the fed funds rate might go. Markets are currently pricing in another half-point Fed rate hike in February, although there is a good chance of a quarter-point move.

Fed chief Powell’s remarks at 2:30 pm ET, along with the CPI inflation report, could set the direction of Fed policy in 2023.

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Powell and several policymakers have indicated that a recession may be necessary to get inflation under control.

dow jones futures today

Dow Jones futures open at 6 p.m. ET on Sunday, along with S&P 500 futures and Nasdaq 100 futures.

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


Join IBD experts as they analyze actionable stocks in Stock Market Rally on IBD Live


stock market rally

The stock market rally saw a significant comeback for the major indices in the latest week.

The Dow Jones Industrial Average sank 2.8% in last week’s stock market trading. The S&P 500 index lost 3.4%. The Nasdaq Composite fell 4%. The small-cap Russell 2000 fell 5.1%.

The 10-year Treasury yield rose 6 basis points to 3.57%, from 3.4% mid-week.

US crude oil futures fell 11% last week to $71.02 a barrel, while gasoline futures fell 9.8%. Both touched 2022 lows. Natural gas prices declined 0.6%.

ETF

Among major growth ETFs, the iShares Extended Tech-Software Sector ETF (IGV) declined 4.6%, with Microsoft stock in the lead. The VanEck Vectors Semiconductor ETF (SMH) retreated 1.7%.

Reflecting more-speculative story stocks, the ARK Innovations ETF (ARKK) fell 9.2% last week and the ARK Genomics ETF (ARKG) fell 8.1%. TSLA stock is a major holding in Ark Invest’s ETF.

The SPDR S&P Metals & Mining ETF (XME) gave up 6.4% last week. The Global X US Infrastructure Development ETF (PAVE) fell 2.85%. The US Global Jets ETF (JETS) dropped 3.3%. The SPDR S&P Homebuilders ETF (XHB) fell 2%. The Energy Select SPDR ETF (XLE) dived 8.45%, decisively breaking its 50-day line. The Financial Select SPDR ETF (XLF) retreated 3.9%. The Health Care Select Sector SPDR Fund (XLV) dropped 1.3% after climbing in eight of the past nine weeks.


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megacap stocks

Apple stock fell 3.8% in the past week, falling below that key level on Tuesday and turning resistance there on Friday. Bad news may have priced in iPhone production, and AAPL stock is rebounding.

Fellow Dow tech titan Microsoft stock also sank 3.8% but found support at a 21-day line, marginally above its 50-day rise. But it is well below the 200 day line. MSFT stock is essentially flat versus a month ago, like the S&P 500 and Nasdaq.

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With Friday’s 3.2% pop, Tesla stock posted an 8.1% drop in the latest week. TSLA stock is bouncing back from recent bear market lows. Tesla announced new China incentives last week with widespread media reports that the Shanghai plant would cut production significantly over the next few weeks, even halting Model Y output.


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to see stock

Caterpillar stock fell 3.7% last week to 227.29, hitting a 21-day line low. Retreats can be a creative shakeout. CAT stock has a buy point at 238 or 239.95 from a long cup base. In another week, the Dow heavy equipment giant may have a flat base with a 239.95 buy point. A slightly longer pause will allow the bullish rising 50-day line to narrow the gap with CAT stock.

Goldman stock fell 5.6% in the latest week to 359.14, round-tripping the breakout from a cup base with a 358.72 buy point, before rising slightly above it. A solid bounce from here could prompt a new entry, especially if the 50-day or 10-week line holds. According to MarketSmith analysis, GS stock has a 13-month cup-with-handle base with a 389.68 buy point on the weekly chart. Last week has now added more depth to that handle, which could also become a flat base in a week.

Sanmina stock fell 7.3% to 62.48 last week. SANM stock was consolidating strongly in profit-taking territory after its October breakout from a cup base. Shares may have started a retracement to the 50-day/10-week line, offering a buying opportunity, although the weekly decline was abrupt. SANM stock is also trading on a potentially flat base.

McKesson stock fell 4% last week to 371.37, falling below the 50-day and 10-week lines on Friday. MCK stock is working on a fresh consolidation after a sharp selloff on November 10-11 that slammed many defensive medical stocks. A move above the December 2 high of 389.45 could offer an early entry, which is still close to the moving averages.

MELI stock fell 5.1% to 896.48, its fourth straight weekly decline. The Latin American e-commerce and payments giant has a 1,095.44 buy point, with a trendline entry around 1,025. An aggressive entry could be a decisive retracing of the moving averages of MELI stock with December 2 high of 957 as a trigger. While MercadoLibre stock is trending lower, the weekly losses come on mild volume with some relatively strong positive closes.

Market Rally Analysis

A week ago, the stock market rally was hitting new highs with the S&P 500 above its 200-day line for the first time in months. But as investors reevaluated the jobs report and Fed chief Powell’s comments, the major indexes retreated.

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The S&P 500 fell below its 200-day line, while the Nasdaq tested its 50-day. Both faced resistance at the 21-day line at the end of the week. The Russell 2000 fell below its 200-day and 21-day lines and settled just below its 50-day, undercutting its 10-week line.

Leading the rally, the Dow is holding support around its 21-day.

The S&P 500 is basically where it’s been since Nov. 10, when October’s CPI inflation report sent stocks soaring. The Nasdaq and Russell are back at early November 2000 levels, but also near their late October highs.

If you had to conjure up a scenario to entice investors to repeat the worst, this could be the current uptrend blueprint: a market rally of a few big one-day gains followed by pullbacks over several sessions.

It’s still a definite market rally. However, further losses such as the Nasdaq, or especially the S&P 500, clearly breaking their 50-day lines, would be worrying.

Tuesday’s November CPI inflation report and Wednesday’s Fed meeting announcement and Powell’s comments could provide a catalyst for a continued market rally or a decisive selloff. But they could inspire yet another big market pop that seems decisive, only to be followed by another pullback.


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What should we do now

Investors should be wary of adding risk on until the CPI inflation report and Fed meeting are in the rearview mirror. Even as markets jump on inflation data and Fed chief Powell’s comments, investors should be selective about new purchases if major indexes slide back over the next several sessions.

At some point a sustained, steady market rally will take hold. If this happens, the buying opportunities will increase.

So get your stock market holiday shopping list ready. A large number of stocks from various sectors are close or close to doing so.

Read The Big Picture every day to stay in sync with market direction and key stocks and sectors.

Please follow Ed Carson on Twitter @IBD_ECarson For stock market updates and much more.

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