Markets

Market Rally Awaits CPI Inflation Report, Federal Reserve After Ugly Week; Here’s what you need to do

Dow Jones futures open 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 indexes continuing their trend of jumping to new highs but then falling back. It’s a challenging environment to buy stocks.

In the coming week, investors will get a burst of big economic news. On Tuesday, the Ministry of Labor will publish its inflation report for the month of November. On Wednesday afternoon, the Federal Reserve will raise interest rates once more, with Fed chief Jerome Powell signaling further tightening in early 2023.

It can be a catalyst for big market gains or losses, or choppy sideways action can continue. Investors should probably wait for the inflation report and Fed news before adding exposure.

Breakout failures or fizzles are rife, with DXCM shares falling back on Friday after briefly clearing a buy point on Thursday following FDA approval.

But here are five stocks to watch: Dow Jones giants Caterpillar (CAT) and Goldman Sachs (GS), Sanmina (SAM), McKesson (MCK) and Free market (MELI). To be clear, none of these stocks are actionable, and MELI stocks in particular need some work.

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

The video embedded in the article reviewed the market action in depth and analyzed Dexcom (DXCM), MercadoLibre and CAT shares.


Fed May Drop Its 2% Inflation Target – Or Economy, S&P 500 Faces Hard Landing


CPI inflation and Fed meeting

Early on Tuesday, the Ministry of Labor will publish the consumer price index for November. Headline and core CPI inflation rates should cool over the next several months, if only because comparisons become more difficult. But prices for services have been stubbornly strong.

The Federal Reserve wants to see more substantial declines in services inflation as well as wage increases before it halts interest rate hikes. At 2pm ET, the Fed is expected to raise its fed funds rate by 50 basis points to 4.25%-4.5%, ending a streak of four 75 basis point hikes. Investors will want some clues about the February meeting and how high the Fed Funds rate could ultimately go. Markets are currently pricing in another half-point Fed rate hike in February, although there is a decent chance of a quarter-point move.

Fed chief Powell’s comments at 2:30 PM ET, along with the CPI inflation report, could set the tone for Fed policy heading into 2023.

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

Dow Jones Futures Today

Dow Jones futures open at 6:00 PM ET on Sunday along with S&P 500 futures and Nasdaq 100 futures.

Remember the action overnight 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 the stock market rally on IBD Live


Stock market rally

The stock market rally saw significant pullbacks for key indices in the past week.

The Dow Jones Industrial Average fell 2.8% last week stock exchange trading. The S&P 500 index lost 3.4 per cent. The Nasdaq composite fell 4 per cent. The small-cap Russell 2000 fell 5 per cent.

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

U.S. crude oil futures fell 11% to $71.02 a barrel. barrel last week, with gasoline futures down 9.8%. Both reached lowest levels in 2022. Natural gas prices fell 0.6 per cent.

ETFs

Among key growth ETFs is the iShares Expanded Tech-Software Sector ETF (IGV) fell 4.6%, with Microsoft shares a large holding. VanEck Vectors Semiconductor ETF (SMH) retreated 1.7%.

Reflecting more speculative history stocks, the ARK Innovation ETF (SHEET) fell 9.2% last week, and the ARK Genomics ETF (ARKG) 8.1%. TSLA stock is a massive holding across Ark Invest’s ETFs.

SPDR S&P Metals & Mining ETF (XME) gave up 6.4% last week. Global X US Infrastructure Development ETF (POPE) fell back 2.85%. US Global Jets ETF (JETS) fell 3.3%. SPDR S&P Homebuilders ETF (XHB) fell 2%. Energy Select SPDR ETF (XLE) plunged 8.45% and decisively broke its 50-day line. Financial Select SPDR ETF (45) retreated 3.9%. Health Care Select Sector SPDR Fund (XLV) fell 1.3% after climbing in eight of the previous nine weeks.


Five Best Chinese Stocks to Watch Now


Megacap stocks

Apple shares fell 3.8% in the past week, falling below that key level on Tuesday and hitting resistance there on Friday. Bad news about iPhone production could be priced in, and AAPL stock is on the rise.

Fellow Dow tech titan Microsoft stock also fell 3.8%, but held support at the 21-day line, modestly above an even rising 50-day. But it is well below the 200-day mark. MSFT stock is largely flat from a month ago, as are the S&P 500 and Nasdaq.

Tesla stock is down 8.1% in the past week, even with Friday’s 3.2% pop. TSLA stock bounces off recent bear market lows. Tesla announced new China incentives this past week, with widespread media reports that the Shanghai factory will significantly cut production over the next few weeks and even halt Model Y production.


Tesla vs. BID: Which EV giant is the best buy?


Stocks to watch

Caterpillar shares fell 3.7% to 227.29 last week, undercutting the 21-day line. The retreat may end up being a constructive shakeout. CAT stock has one buy points at 238 or 239.95 from a long cup base. In another week, the Dow heavy equipment giant could have one flat bottom with that 239.95 purchase points. A slightly longer break would let the rapidly rising 50-day line narrow the gap with CAT shares.

Goldman shares fell 5.6% in the past week to 359.14, rounding out a breakout from a cup base with a buy point of 358.72 before rising slightly above that. A solid bounce from here could offer a new entry, especially if the 50-day or 10-week line catches up. On a weekly chart, GS stock has a 13-month high cup-with handle basewith a buy point of 389.68 according to MarketSmith analysis. The past week has now created more depth on that handle, which could also become a flat base in a week.

Sanmina shares fell 7.3% to 62.48 last week. SANM stock had consolidated strongly in the profit zone after a breakout in October from a cup base. Shares could start a pullback to the 50-day/10-week line, providing a buying opportunity, although the weekly decline was sharp. SANM stock is also working on a possible flat base.

McKesson shares fell 4% to 371.37 last week and fell just below the 50-day and 10-week lines on Friday. The MCK share is working on a new consolidation after a strong sell-off on 10-11. November that hit many defensive medical stocks. A move above the December 2 high of 389.45 could offer an early entry, still close to moving averages.

MELI shares fell 5.1% to 896.48, its fourth straight weekly decline. The Latin American e-commerce and payments giant has a buy point at 1,095.44 with a trend line around 1,025. An aggressive entry could be a decisive retracement of MELI stock’s moving average, with the December 2 high of 957 as its trigger. While MercadoLibre stock has been down, the weekly losses come on lower volume with some relatively strong positive closes.

Analysis of market rally

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

The S&P 500 fell below its 200-day line, while the Nasdaq tested its 50-day. Both hit resistance at the 21-day line late in the week. The Russell 2000 tumbled below its 200-day and 21-day lines and came all the way down to its 50-day, just undercutting its 10-week line.

The rally-leading Dow holds support around its 21-day.

The S&P 500 is basically where it was after Nov. 10, when a tame October CPI inflation report lifted stocks. The Nasdaq and Russell 2000 are back to early November levels, but also the peaks of late October.

If you had to design a scenario to lure investors in to stay hard up repeatedly, this current uptrend might be the plan: A market rally with a few big one-day gains followed by pullbacks over multiple sessions.

It is still a confirmed market rise. Further losses, such as the Nasdaq or especially the S&P 500 clearly breaking their 50-day lines, would be worrisome.

Tuesday’s November CPI inflation report and Wednesday’s Fed meeting announcement and Powell’s comments could be a catalyst for a sustained market rally or a decisive sell-off. But they can also spur another big market pop that seems decisive, only to be followed by another pullback or pullback.


Time The Market with IBD’s ETF Market Strategy


What should I do now

Investors should be cautious about adding exposure until the CPI inflation report and the Fed meeting are in the rearview mirror. Even if markets jump on the inflation data and Fed Chair Powell’s comments, investors should be selective about new purchases if the major indexes simply fall back over the next several sessions.

At some point, a sustained, steady market rally will take hold. When that happens, buying opportunities will be plentiful.

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

Read 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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