Dow Jones futures: Cisco, Nvidia continue gains; The key recession signal is getting stronger

Dow Jones futures rose overnight, along with S&P 500 futures and Nasdaq futures, with Nvidia and Cisco earnings in focus.

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The stock market rally retreated amid weakness Target (TGT) earnings and vacation guidance as well as Micron technology (IN) reducing plans to manufacture memory chips. The bond market is flashing recession risks, with yields on 10-year Treasuries continuing to fall while short-term interest rates remain high.

EV giant Tesla (TSLA) retreated, showing the weakest recent performance among mega-cap stocks.

Profits

Nvidia (NVDA), a lithium giant Chemical and Mining Society of Chile (SQM) and Cisco Systems (CSCO) headlined Wednesday night’s gains.

Shares of NVDA rose modestly in overnight trading, following mixed earnings and guidance.

Shares of CSCO rose 4% in extended action as Cisco topped the outlook for the fiscal quarter and is revenue driven. Cisco shares fell 1.1% on Wednesday, trading between their 50-day and 200-day lines. Stocks in the IBD Ranking Arista Networks (countries) rose slightly on Cisco earnings.

SQM earnings are still due tonight. Shares of SQM fell 2.6% on Wednesday, down more than 10% this week on concerns about the price of lithium. The Chilean lithium and fertilizer giant is in a cup base with 115.82 point of purchase. Can work on handle.

Chinese e-commerce giant Ali Baba (GRANDMA) and US department store chains Macy’s (M) and on a spike (KSS) are expected early Thursday. BABA shares fell modestly on Wednesday, but after jumping 11% on Tuesday. Shares of Macy’s and KSS fell Wednesday after Target’s holiday warning.

Dow Jones futures today

Dow Jones futures rose a fraction to fair value. S&P 500 futures rose. Nasdaq 100 futures gained 0.1%. CSCO stock is a component of the Dow Jones, S&P 500 and Nasdaq, but Nvidia is more heavily weighted in the S&P 500 and Nasdaq.

The yield on the 10-year Treasury note rose 3 basis points to 3.72%.

Crude oil futures fell 1%.

Republicans have regained control of the House, according to multiple media outlets. But it will be a slim majority, far less than expected before Election Day.

Remember this night action in Dow futures and elsewhere does not necessarily become an actual trade in the next regular Stock Exchange session.

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Stock market rallies

The stock market rally lost ground on Thursday, with small caps and technology companies leading the decline.

The Dow Jones Industrial Average fell 0.1% on Wednesday Exchange Trading. The S&P 500 was down 0.8%. The Nasdaq Composite Index was down 1.5%. The small-cap Russell 2000 fell 1.8%.

U.S. crude oil prices fell 1.5 percent to $85.59 a barrel. Natural gas futures rose 2.8%.

The yield curve of government bonds shows recession risk

The yield on the 10-year Treasury note fell 11 basis points to 3.69%, its lowest level since early October and down from 4.15% just a week earlier. Benchmark Treasury yields are already below the current federal funds rate range of 3.75%-4%, with the Fed expected to raise rates by 50 basis points to 4.25%-4.5% next month.

The yield on two-year Treasuries, more closely tied to Fed policy, was flat at 4.36%, while the three-month yield was at 4.23%. The tightening inversion in the yield curve between the three-month and 10-year Treasuries was the highest in a short period in late 2019. This points to rising risks of a recession or, at best, weak economic growth in 2023.

Fed chief Jerome Powell and some of his colleagues have signaled that a recession may be needed to bring inflation under control, although other policymakers see a decent chance of a soft landing.

The persistently inverted yield curve comes amid still-solid labor markets and a strong October retail sales report.

ETFs

Avg the best ETFsInnovator IBD 50 ETF (FFTY) fell 1.7%, while the Innovator IBD Breakout Opportunities ETF (BOOTH) lost just over 1%. iShares Expanded Tech-Software Sector ETF (IGV) lost 2.1%, with many cloud software names having a poor session. VanEck Vectors Semiconductor ETF (SMH) fell 3.6%, as shares of Nvidia and Micron core components.

SPDR S&P Metals & Mining ETF (XME) fell just over 2%, and the Global X US Infrastructure Development ETF (PAVING) fell by 0.5%. US Global Jets ETF (STREAMS) gave up 2.4%. SPDR S&P Homebuilders ETF (XHB) declined by 1.4%. Energy Select SPDR ETF (XLE) was down 2%, and the Financial Select SPDR ETF (45) submerged 0.5%. Select Healthcare Sector SPDR Fund (XLV) ended just below break-even.

Reflecting the more speculative stocks of history, the ARK Innovation ETF (ARKK) fell 5.15% and the ARK Genomics ETF (ARKG) 3.7%. Tesla stock remains a major holding in Ark Invest’s ETF.

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Nvidia earnings

Nvidia’s earnings missed views in the third quarter, but revenue fell less than expected. Demand for data center chips remains strong. Gaming revenue fell, but not as much as feared. The chip giant is targeting slightly lower sales for Q4.

Shares of Nvidia rose 2% in active overnight trading. Shares fell 4.5% to 159.10 on Wednesday. But NVDA shares rallied after hitting a bear market low of 108.13 on Oct. 13 on hopes that business will improve along the way. The chip giant moved well above its 50-day line but is still below the 200-day.

Nvidia stock has no buy point. Ideally, the stock will rise above the 200-day line and create a new base.

Tesla stock

Tesla shares fell 3.9% on Wednesday to 186.92. Despite being above its two-year low of 177.12 set on Nov. 9, TSLA shares are hitting resistance at the 10-day moving average. The EV giant has not closed above its 21-day line since September 21.

Other megacaps have struggled, but An apple (AAPL), Microsoft (MSFT) and Google Parent Alphabet (GOOGLE) are above their 50-day moving averages, while even Facebook-parent Meta platforms (META) is above its 21-day line.

Meanwhile, other EV stocks look as bad or worse than Tesla. Also, CEO Elon Musk’s Twitter reign could weigh on TSLA stock in a number of ways.

Musk testified Wednesday in a lawsuit about Tesla stock options from 2018 that represent about $50 billion of his fortune. He hinted that he won’t be the head of Twitter forever.

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Market Rally Analysis

A stock market rally could be due for a pause or a pullback, and that’s what happened on Wednesday.

The Dow Jones is holding comfortably above its 200-day line, resting just below its short-term highs in August. The S&P 500 looks relatively normal, with a modest decline not far from the 200-day line.

The Nasdaq is still well above the 50-day line, but is back below its near-term highs since October. The Russell 2000 fell below its 200-day line and broke an intraday low on Monday.

Meanwhile, several stocks that had signaled buys over the past few sessions returned lower on Wednesday. The growth play has slowed overall while defensive names have recovered and defensive growth stocks have held up, though many retailers have slumped on Target’s missed revenue.

If the market goes higher in the near term, Wednesday’s action will soon be forgotten. But if the Nasdaq falls below its 50-day and the leading stocks come under more pressure, that will be worrisome.

While markets are rightfully focused on Fed policy, there are other concerns as well. Still, the cumulative effect of the Fed’s rate hikes this year is weighing on the economy. And the impact will continue for several months after the rate hike ends.

An inverted yield curve reflects rising recession risks.

Even now, the combination of high inflation and weakening demand is taking a toll. Target revenue showed this, albeit competitively Walmart (WMT) had strong results and directions. Inflation may slowly disappear next year, but that doesn’t mean the outlook for corporate earnings and stock prices is good.

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What should we do now

Wednesday’s action offers a reason why investors should be cautious about adding exposure quickly. Buying a bunch of new positions in one day can backfire if the market pulls back, as it did on Wednesday. Better to add exposure gradually, assuming the market rally and your positions advance.

The stock market rally is still in good shape, but prone to big swings, sector rotations and earnings surprises. It is not yet clear which stocks and sectors will lead. So don’t concentrate too much on a particular sector or topic.

But you want to regularly update your watchlists, casting a wide net.

Early records are still important. Traditional buy points, especially if they are noticeably above the 50-day line, have not worked particularly well.

Investors may still want to take partial profits when they get a quick profit from a stock. This can give you the confidence to hold the remaining bet for longer and will protect your portfolio from the stock’s reverse movement.

Read it The big picture every day to stay in sync 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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