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Market Rally Suffers Bearish Reversal; What To Do Now

Dow Jones futures were little changed late Wednesday along with S&P 500 futures and Nasdaq futures with Snowflake stock and other software earnings in focus overnight. The stock market rally suffered a bearish reversal Wednesday after the CDC confirmed the first U.S. case of the omicron Covid variant, in California.




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The major indexes opened by bouncing above or from key levels, only to break moving averages on the downside. Decliners beat advancers easily after a promising start for market breadth.

Bottom line: The stock market rally is under increasing pressure. Investors should take a more defensive stance.

Megacap techs Apple (AAPL), Microsoft (MSFT), Google parent Alphabet (GOOGL) led the morning rally, but even they gave up gains to close fractionally lower. Chipmakers started strong with Ambarella (AMBA) skyrocketing on earnings. But several breakouts faltered with the afternoon sell-off. Meanwhile,

Meanwhile, ugly action continued for software stocks. Salesforce.com (CRM) dived on weak forecasts. Zscaler (ZS), the clear cybersecurity leader in recent weeks, reversed lower despite strong results and guidance.

After the close, several software makers released earnings, including Snowflake (SNOW), CrowdStrike (CRWD), Okta (OKTA), Synopsys (SNPS) and Veeva Systems (VEEV). Chipmaker Semtech (SMTC) and teen-focused discounter Five Below (FIVE) also reported.

SNOW stock jumped overnight after Snowflake revenue and guidance. CRWD stock edged higher on strong CrowdStrike earnings and guidance. But both software stocks had tumbled in recent days and weeks. Okta stock and Veeva retreated following results, after both tumbling in recent weeks.

SNPS stock fell slightly after strong earnings and guidance, but in-line revenue. Synopsys stock fell 1.4% in Wednesday’s session, just below a buy point. FIVE stock rebounded overnight on earnings, but after tumbling below its 50-day and 200-day line. SMTC stock edged higher after narrowly topping views and guiding in line.

Microsoft and Google stock are on IBD Leaderboard. NXPI stock is on SwingTrader. Microsoft stock, Google and Synopsys are on IBD Long-Term Leaders. Google, Microsoft and ZS stock are on IBD 50. UCTT stock was Wednesday’s IBD Stock Of The Day.

Dow Jones Futures Today

Dow Jones futures rose a fraction vs. fair value. S&P 500 futures were flat and Nasdaq 100 futures edged lower.

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


Join IBD experts as they analyze actionable stocks in the stock market rally on IBD Live


Omicron Variant Case In U.S.

While no surprise, the omicron Covid variant has reached the U.S. The CDC announced that an omicron case in California has been found. The patient returned on Nov. 22 from South Africa, where the omicron variant was first detected, and tested positive on Nov. 29. The World Health Organization said on Wednesday that omicron has been reported in at least 23 countries.

The California omicron patient had been vaccinated, but had not yet received a booster shot, the CDC said. The patient has mild symptoms so far.

It maybe another two weeks or so before health officials have a grasp on how transmissible the omicron variant is, said White House chief medical advisor Dr. Anthony Fauci. Coronavirus vaccine makers also may give an indication by then on how effective their treatments are in stopping omicron infections and limiting hospitalizations.

Moderna (MRNA) tumbled 12% on Wednesday, below its 50-day line. BNTX stock gave up 4.9%. BioNTech (BNTX) vaccine partner Pfizer (PFE) rallied 1.8%.

New York Fed President John Williams said Wednesday the omicron variant could slow economic growth while increasing inflationary pressures. This quasi-stagflation warning echoed Fed chief Jerome Powell’s comments to Congress on Tuesday. Powell also said he was open to speeding up the bond taper at the Fed meeting on Dec. 14-15.

Coronavirus cases worldwide reached 263.65 million. Covid-19 deaths topped 5.24 million.

Coronavirus cases in the U.S. have hit 49.52 million, with deaths above 804,000.

Stock Market Rally

The stock market rally started off with strong, broad gains, but reversed to close at session lows as omicron variant fears returned.

The Dow Jones Industrial Average fell 1.3% in Wednesday’s stock market trading. The S&P 500 index retreated 1.1%. The Nasdaq composite slumped 1.8%. The small-cap Russell 2000 skidded 2.3%.

Apple stock hit a record high, but reversed for a 0.3% drop, and increasingly extended from a Nov. 17 breakout. Microsoft stock dipped 0.15%. Google stock sank 0.6% after retaking its 50-day line and coming right up to a an early entry.

Crude oil futures rose more than 4% intraday, but closed down 0.9% at $65.57 a barrel. The 10-year Treasury yield nearly hit 1.5% intraday but closed down 1 basis point to 1.43%.


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ETFs

Among the best ETFs, the Innovator IBD 50 ETF (FFTY) skidded 3.8%, while the Innovator IBD Breakout Opportunities ETF (BOUT) shed 1.2%.

The iShares Expanded Tech-Software Sector ETF (IGV) tumbled 4.3%. Microsoft stock is a major IGV holding, but so is CRM stock, which plunged 12%. CRWD stock and Zscaler also are in IGV. The VanEck Vectors Semiconductor ETF (SMH) dipped 0.35%, with MU stock a notable holding. SNPS stock is in both IGV and SMH.

SPDR S&P Metals & Mining ETF (XME) slumped 2.2% and Global X U.S. Infrastructure Development ETF (PAVE) gave up 1.3%. U.S. Global Jets ETF (JETS) sank 4.5%, reversing lower to hit a fresh 52-week low as travel stocks tumbled on the U.S. omicron news. SPDR S&P Homebuilders ETF (XHB) edged down 0.2%, with actual builders doing well. The Energy Select SPDR ETF (XLE) and the Financial Select SPDR ETF (XLF) both retreated 1.1%.

Reflecting more-speculative story stocks, ARK Innovation ETF (ARKK) dived 6.7%, a six-month low and 52-week closing low, as its software holdings came under pressure. ARK Genomics ETF (ARKG) lost 4.6%, back at 52-week lows.


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Market Rally Analysis

The stock market rally, already under pressure, opened strong and closed weak, a classic trait of weak markets. The Nasdaq moved above its 21-day line intraday, but reversed lower to just below its 50-day line. The S&P 500 index briefly reclaimed its 21-day line but then skidded below its 50-day line. The Dow Jones, which rallied from just above its 200-day line, came back to close below that long-term support level for the first time since July 2020.

The Russell 2000 came up to its 200-day line and then fell to a three-month low. The small-cap index is a good proxy for market breadth. Once again, losers beat winners, by 3-to-1 on the Nasdaq, after a promising start.

It’s a sign of how shaky the market that official confirmation of one U.S. omicron patient with mild symptoms trigger a bearish reversal.

While it’s not quite accurate to say Apple stock is the only leader holding up, it feels that way. Actionable stocks are scarce and prone to head fakes.

Financials and energy stocks aren’t wrecked, but they’ve taken serious hits amid tumbling, whipsaw action in Treasury yields and crude oil prices. They need time to repair themselves.

The entire software sector looks damaged, with more and more leaders breaking through key levels. Salesforce weighed on business software broadly, but the ZS stock reversal was even more discouraging. If the best-performing software stock right now shows such bearish action despite seemingly great results and guidance, what are the odds that other software names will power ahead?

Yes, Microsoft stock is still holding up well, but that may be the exception that proves the rule. Investors arguably are treating MSFT stock more like a cloud-computing play than a software maker.

The CBOE Volatility Index, or VIX, jumped again on Wednesday, topping Friday’s peak and setting a fresh nine-month high. Big spikes and high readings in the market’s fear gauge can signal at least a short-term bottom. But it doesn’t have to happen right away and it doesn’t have to last, as Monday’s one-day market rebound showed.


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What To Do Now

The stock market rally was already under pressure after Tuesday’s losses. With Wednesday’s sharp downside reversal, the uptrend is near the breaking point. Whether it’s the major indexes, leading stocks — aside from a real holdouts such as Apple — or overall breadth, the market rally does not look healthy.

It’s a time to be defensive, preserving capital and reducing risk. Ultimately, it’s hard to make bets on the market or specific sectors or stocks with so much uncertainty about the omicron Covid variant. And don’t forget that the market rally’s woes proceeded omicron.

Yes, the VIX suggests the market rally will have a bounce soon, but when and for how long aren’t clear. If you felt like you should have exited some positions Wednesday, you could use a bounce to reduce exposure,

Don’t try to guess the bottom. Again, if the market rally truly strengthens and goes on a meaningful run, there were be opportunities to take advantage.

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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