Fed Market Recovery, Apple, Tesla and Cloud Stocks; what to do now

Dow Jones futures will open Sunday evening, along with S&P 500 and Nasdaq futures. Even with a solid close in Friday’s whipsaw session, the stock market’s rally suffered significant damage last week, with the major indexes falling on the back of fake comments from Fed chief Jerome Powell.

The Nasdaq had its worst week since January, when megacaps tumbled and cloud software crashed.

Apple ( AAPL ), Amazon.com ( AMZN ) and Google parent Alphabet ( GOOGL ) all lost more than 10% for the week, with Facebook’s Meta Platforms ( META ), Tesla shares and Microsoft shares not back. Shares of Google, Meta, Amazon.com ( AMZN ) and Microsoft ( MSFT ) hit bear market lows. Shares of Apple and Tesla ( TSLA ) didn’t, but they’re close.

Meanwhile, Twilio ( TWLO ) and Atlassian ( TEAM ) crashed on Friday with disappointing results and guidance, losing more than 40% for the week. Plenty of other software names fell, with or without gains.

A market rally trying to fight the Fed with the major tech sector falling? That’s a tall order. So while there are some stocks and sectors showing strength, investors should be extremely cautious in the current environment.

In other news, Warren Buffett’s Berkshire Hathaway ( BRKB ) reported a 20% increase in operating profit on Saturday. The conglomerate suffered a net loss as the ongoing bear market hit investments.

Dow Jones futures today

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

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

Join IBD’s experts as they analyze actionable stocks in the stock market’s recovery on IBD Live

Stock Exchange meeting

The stock market rally got off to a decent start to the week, but then fizzled out Wednesday afternoon with dovish comments from Fed chief Jerome Powell. Major indexes gave up more ground on Thursday. Stocks rallied on Friday after a mixed jobs report, but ultimately closed strongly for the day.

The Dow Jones Industrial Average still fell 1.4% in the stock market last week. The S&P 500 fell 3.3%. The Nasdaq fell 5.7%, its worst loss since the week ended Jan. 21. The small-cap Russell 2000 fell 2.4%.

The 10-year Treasury yield rose 15 basis points to 4.16%. The 10-year yield resumed its advance after snapping a 12-week winning streak and briefly retreating to around 4%.

The dollar rose 0.2% for the week but fell 1.9% on Friday, its biggest one-day drop in years. That likely contributed to Friday’s stock market advance.

Markets now see a 61.5% chance of a 50 basis point hike at the December Fed meeting. The consumer price index for October will be published on Thursday. The November jobs and CPI reports will be released ahead of the Fed’s December 14 rate hike decision.

US crude futures rose 5.4% last week to $92.61 a barrel. Natural gas shot up almost 13%.

Technological shipwreck

Apple shares, which had risen to their 200-day line the previous week, fell 11.15% to 138.38 last week. AAPL stock was a penny off its October low, though it still has some distance from bear market lows in June. Microsoft slipped 6.1%, Google 10.1%, Amazon 12% and META shares 8.5%, all at multi-year lows. Tesla shares fell 9.2% for the week, nearing their intraday low since Oct. 24 on Friday. This after starting the week strong, reaching 237.40 intraday on Tuesday.

Meanwhile, these are dark days for cloud software. Here are just a few examples: Atlassian shares fell 29% on Friday and 38% for the week. Twilio shares fell nearly 35% on Friday and 43.5% for the week. Snowflake (SNOW), which won’t report for a few weeks, was down 17% for the week.

Meanwhile, Fortinet ( FTNT ) fell 17.5% for the week after weak revenue guidance offset strong earnings and a bullish revenue outlook. Paycom (PAYC) fell 10.3% despite strong results and guidance.

Companies looking to cut costs may curb software spending as they set budgets for 2023.

ETFs

Among the top ETFs, the Innovator IBD 50 ETF ( FFTY ) fell 1.2% last week, while the Innovator IBD Breakout Opportunities ETF ( BOUT ) lost 2%. The iShares Extended Technology Software Sector ETF ( IGV ) fell 10.2%, with MSFT shares leading the way. The VanEck Vectors Semiconductor ETF ( SMH ) fell just 0.7%, after jumping 4.65% on Friday, closing high in the weekly range.

SPDR S&P Metals & Mining ETF (XME) rose 2% last week. The Global X US Infrastructure Development ETF ( PAVE ) was down 0.1%. US Global Jets ETF (JETS) rose 0.3%. SPDR S&P Homebuilders ETF (XHB) fell 5%. The Energy Select SPDR ETF ( XLE ) rose 2.4%, just below an eight-year high. The Financial Select SPDR ETF ( XLF ) fell 0.9%. The Select Health Sector SPDR Fund (XLV) yielded 1.5%.

Reflecting more speculative stocks, the ARK Innovation ETF (ARKK) fell 9.4% last week and the ARK Genomics ETF (ARKG) retreated 4.65%. Tesla stock is a major holding in Ark Invest’s ETFs.

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Analysis of market concentration

The stock market rally had a bad week, with a hawkish Fed and often weak earnings weighing on the major indexes. The Dow Jones, which has led the market’s uptrend, had the softest decline, but returned below its 200-day moving average. The Russell 2000 hit resistance near the 200-day line, but recovered on Friday to close above the 50-day line. The S&P 500 broke a 50-day high.

The Nasdaq composite, which never reached its 50-day moving average, fell further, closing below its tracking day’s low on Wednesday, a bearish sign.

The major indexes extended losses on Thursday, then took advantage on Friday in a mixed job report.

The negative market action and large reversals of many stocks caused a shift to the “market under pressure”.

The big market mover was Fed Chairman Powell, who pulled the rug out from the market rally by signaling a shift to smaller hikes but a higher top Fed funds rate.

Meanwhile, tech megacaps such as Apple, Tesla and Amazon suffered heavy losses. Cloud software names like Atlassian and Twilio merged, with the latest gains and major factors leading the way.

Chips didn’t have a terrible week, relatively speaking, but only a few names are trading near highs.

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There are several resilient market areas. The healthcare sector looks strong overall. Energy names, which include a wide range of oil stocks, LNG plays and coal mines, plus some solar stocks, are doing well.

Lithium and some steel sets are fine. Infrastructure companies for the energy, utilities and telecommunications industries are a bright area. Networking companies in general are a rare technology area that is a leader. Some restaurants and discount stores are showing strength. Several financial institutions, particularly brokers and brokerages, have made huge gains.

Still, it’s hard to see a strong market rally with such huge tech sectors on the move. It would be hard enough for the major indexes to advance with Apple, Google, Tesla and the cloud software names lagging behind. But to try to advance with these areas collapsing or crashing?

If inflation reports show a clear and meaningful decline, spurring a downward shift in Fed rate hikes, perhaps megacaps and cloud software can fall. However, a return to technological leadership could be a long way off. On the other hand, if the October CPI report on November 10 shows that inflation is still hot, tech stocks could drag down leading sectors to end the market’s recovery.

Tuesday is election day. The stock market tends to do better with divided government, and Republicans are poised to regain control of the House and perhaps the Senate. But political forecasters have predicted at least one House GOP win all year, so it’s unclear whether Tuesday’s actual results will be much of a catalyst.

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what to do now

The stock market rally is under pressure. The Fed is shifting from fast and furious to slow and long, but it’s still hawkish. The technology sector is a disaster. Major indices have undercut some key levels. Major indices and stocks are subject to large intraday and daily swings.

This is not a good environment to buy stocks. Investors should seek to reduce exposure, either explicitly or simply to reduce losses on various positions.

If the market rally shows renewed strength, with the S&P 500 and possibly the Nasdaq above their 50-day moving averages, investors could begin adding exposure. But that will likely require technology to stabilize and inflation data to show some cooling.

If conditions improve, you’ll want to be prepared. There are a number of stocks in the works, and many more not far away. So build your watchlists, be patient and stay engaged.

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Please follow Ed Carson on Twitter at @IBD_ECarson for stock market updates and more.