Dow Jones futures and S&P 500 futures fell slightly Sunday evening, while Nasdaq futures were about flat. Omicron fears are mounting with cases of the Covid variant spreading rapidly. The Netherlands has gone on lockdown while President Joe Biden plans to give a “stark” speech about not being vaccinated.
The stock market rally is in a confirmed uptrend but is struggling as the major indexes and many leading stocks fell last week in whipsaw fashion.
Investors should be on the defensive, waiting for clear market strength before boosting exposure, especially in growth stocks. Microsoft (MSFT) has now joined fellow megacap stalwart Google parent Alphabet (GOOGL) below its 50-day line. Apple (AAPL) fell solidly in its heaviest volume in months, though it’s still holding above its 21-day line.
Nio (NIO) held its annual Nio Day on Saturday. The Chinese EV startup unveiled the ET5, starting at $51,450. It will have a base range of 341 miles, rising to as much as 620 miles, albeit on a very loose standard. The mid-size EV sedan is a potential competitor to the Tesla Model 3, the Xpeng P7 and P5 and the BYD Han. ET5 deliveries will begin in September 2022. Nio claimed record preorders a day later, but gave no specifics.
Nio also will begin deliveries of the upscale ET7 sedan, unveiled at Nio Day 2020, on March 28, 2022. The Nio ET7 has a range of up to 620 miles by China’s loose standard.
Nio says it’ll be in 25 countries by 2025. Along with Xpeng (XPEV) and BYD, Nio has recently started selling some EVs in Norway, a launching pad throughout Europe.
Nio stock could use a lift, hitting a 13-month low intraday before closing higher. Xpeng stock and Tesla (TSLA) also reversed higher from recent lows. China EV and battery giant BYD (BYDDF) is testing recent lows.
Tesla stock could be building a double-bottom base, but the same could have been said in early December. It’s better to wait for a real buy point rather than try to guess the bottom. For TSLA stock, the official buy point could be 1,202.05, with a trend line early entry around 1,140.
In Tesla news, the EV leader has not yet submitted all the paperwork for a final permit to begin production at its Berlin plant, further evidence that output won’t begin until next year. Also, Sen. Joe Manchin, D-W Va., said Sunday that he will not vote for the House’s Build Back Better bill as written. That means no new U.S. EV tax credits for Tesla or General Motors (GM), at least for now, with a growing likelihood that nothing will pass. Other automakers are still eligible for $7,500 federal credits under the existing program.
Micron, Nike Earnings Due
Meanwhile, Micron Technology (MU) and Dow component Nike (NKE) are on tap Monday night, headlining a relatively quiet earnings slate during Christmas week. MU stock and NKE stock are in consolidations, but have pulled back over the past couple of weeks. The Micron earnings and guidance will be relevant for memory and many chip-related plays, while Nike results, forecasts and supply chain comments may be key for apparel and shoe makers and retailers.
Dow Jones Futures Today
Dow Jones futures fell 0.4% vs. fair value. S&P 500 futures sank 0.3% and Nasdaq 100 futures were just above break-even.
U.S. crude oil futures fell 2%, dropping below $70 a barrel.
Coronavirus cases worldwide reached 274.99 million. Covid-19 deaths topped 5.37 million.
Coronavirus cases in the U.S. have hit 51.76 million, with deaths above 827,000.
Covid cases are increasing worldwide and in the U.S., while deaths have been leveling off, reflecting greater vaccination rates. The omicron Covid variant is rapidly becoming the dominant strain in many countries and in much of the U.S. There’s a lot of evidence that Omicron cases are generally mild, especially in the vaccinated. But if total cases skyrocket, that could still strain hospital systems.
Meanwhile, there are a growing number of shutdowns and restrictions and other curbs.
The Netherlands started a “strict” lockdown starting Sunday, even though Dutch cases peaked a couple of weeks ago. That comes a few weeks after Austria locked down. The U.K. and other European governments are mulling similar steps. France banned most non-EU travelers, including from the U.K.
Over the past two years, China’s government has imposed sharp lockdowns to snuff out even small clusters of cases. What will Beijing do if the Omicron gains a foothold, especially with evidence that China’s homegrown vaccine provides little protection vs. the highly infectious Covid variant?
President Biden will give a speech Tuesday on the omicron variant and vaccinations, though it’s unclear what policy steps or curbs will enact or encourage.
Even beyond government restrictions, omicron fears is spurring businesses to react. Apple this past week followed Google in delaying a return to the office. The NFL postponed Saturday games to Monday due to Covid outbreaks affecting several teams. Many Americans will curb activities, though holiday travel will send tens of millions of people visiting family and friends
All these factors raises concerns that the omicron Covid variant will affect economic activity, regardless of the direct health issues.
The weakness in crude oil prices and Treasury yields, in addition to equities, suggests that financial markets are worried about omicron’s impact on economic growth, especially with the Federal Reserve and other central banks turning hawkish.
Stock Market Rally
The stock market rally staged a follow-through day on Wednesday, following the Fed meeting, but techs sold off on Thursday. The major indexes fell for the week.
The Dow Jones Industrial Average sank 1.7% in last week’s stock market trading. The S&P 500 index gave up 1.9%. The Nasdaq composite lost nearly 3%. The small-cap Russell 2000 sank 2.2%
Apple stock fell 4.6% last week after once again flirting with a $3 trillion market cap. MSFT stock slid 5.5%, undercutting December lows on Friday before paring intraday losses, closing just below its 50-day moving average. Google stock retreated 4.2%, also below its 50-day line. Tesla stock tumbled 8.3%, now 8.9% below the 50-day.
The 10-year Treasury yield fell 9 basis points to 1.4% this past week. U.S. crude oil futures fell 1.1% to $70.86, including a 2.1% drop on Friday.
Among the best ETFs, the Innovator IBD 50 ETF (FFTY) tumbled 5%, while the Innovator IBD Breakout Opportunities ETF (BOUT) closed just below breakeven. The iShares Expanded Tech-Software Sector ETF (IGV) sank 3.7%, with Microsoft stock a major holding. The VanEck Vectors Semiconductor ETF (SMH) skidded 4%.
SPDR S&P Metals & Mining ETF (XME) rose 1.5% and Global X U.S. Infrastructure Development ETF (PAVE) slid 2.45%. U.S. Global Jets ETF (JETS) descended 5.2%. SPDR S&P Homebuilders ETF (XHB) stepped down 5.5%. The Energy Select SPDR ETF (XLE) retreated 5% and the Financial Select SPDR ETF (XLF) fell 1.2%, including Friday’s 2.3% loss. The Health Care Select Sector SPDR Fund (XLV) rose 2.5% after the prior week’s 3.2% advance.
Reflecting more-speculative story stocks, ARK Innovation ETF (ARKK) rose 1.1% and ARK Genomics ETF (ARKG) 5.9%, with both surging Friday as beaten-down growth rebounded. Tesla stock is ARK Invest’s largest holding across its ETFs. ARK Invest also owns some Xpeng and BYD stock.
Market Rally Analysis
The S&P 500 and Nasdaq had follow-through days on Wednesday, thanks to an expectation-breaking rally that afternoon following the Fed meeting. That confirmed the new rally.
But not all confirmed rallies work. In late 2018, the stock market had two confirmed rallies that almost immediately failed, before a final bottom was reached just before Christmas.
It’s unclear if the current confirmed market rally will thrive or fail, but the early action has been unsettling. Tech stocks sold off hard Thursday. On Friday morning, the Nasdaq undercut the low of Wednesday’s follow-through day and came within 30 points of undercutting the early December low before rebounding for a slim loss.
While a market rally is still in force until the indexes undercut the rally low, a close below the FTD low is a very bearish signal.
The S&P 500 fell below Wednesday’s FTD low intraday as well, testing the 50-day line before paring losses. The Dow Jones fell through its 50-day line and closed below Wednesday’s lows, though the blue-chip index did not have an FTD.
The Russell 2000 hit a five-month low intraday Friday, but did reverse higher. Still, the Russell’s strong decline over the past several months reflects the sharp deterioration in market breadth. That’s evident in the advance/decline line as well as new highs vs. new lows.
Sector rotation adds to the complexity. Steel stocks and fertilizer makers, such as Nucor stock and Nutrien (NTR), are looking good. A number of medicals are acting well from a variety of groups. CUBE stock and other REITs have been holding up or advancing. But financials tumbled Friday after a promising Thursday. Homebuilders fell back last week, partly due to a Lennar (LEN) earnings miss. Growth stocks still look awful, with a few exceptions.
What To Do Now
An outright market correction sends a clear signal — get out. A whipsaw market with a downside bias is extremely dangerous. It’s an environment that lures investors in, only to sell off sharply again.
Investors who bought growth stocks near Wednesday’s highs were sitting on big losses a day later. You can take your lumps and cut your losses short, or hold on and hope for a bounce, risking much-bigger losses.
Aside from possibly nibbling at leaders in sectors that are on the upside, don’t get drawn into this environment. Choppy markets chop up investors, financially and mentally. If the market bounces, you might use that as an opportunity to scale back exposure if you got too aggressive recently.
Wait for the market rally to show real strength. Getting above Thursday’s highs on the major indexes would be a positive signal. Even then, investors should add exposure slowly, and only if there are good stocks to buy. If the Nasdaq does clear Thursday’s highs, stocks such as Microsoft and Google would almost certainly reclaim their 50-day lines and possibly flash early entries.
But there’s a good chance that the stock market rally fails and the correction deepens. In such a scenario, Apple could round-trip its breakout, Tesla stock could head for its 200-day line as many growth names simply break down.
For now, investors should focus on building up their watchlists, focusing on stocks with strong relative strength and perhaps holding at key levels.
Read The Big Picture every day to stay in sync with the 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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