Dow Jones Futures Fall, Tesla AI Chief Exits; Market Rally Sees ‘Everything’ Fed Rate Hike

Dow Jones futures fell slightly overnight, along with S&P 500 futures and Nasdaq futures. The stock market rally saw more losses, but closed off lows as investors tried to weigh the implications of a hot inflation report and the Federal Reserve being even more aggressive with rate hikes. Treasury yields sent louder recession signals.

X

JPMorgan Chase (JPM) and Morgan Stanley (MS) report second-quarter earnings early Thursday, kicking off big bank earnings. Taiwan Semiconductor (TSM) earnings will provide insight into chipmakers. JPM stock, Morgan Stanley and Taiwan Semi are in long downtrends.

Li Auto (LI) rebounded bullishly Wednesday, while EV giants Tesla (TSLA) and BYD (BYDDF) try to find support at key levels. Shockwave Medical (SWAV), AstraZeneca (AZN) and McKesson (MCK) showed constructive action near buy points. Olaplex (OLPX) flashed positive signals after the 2021 IPO sold off for much of this year.

LI stock was added to SwingTrader on Wednesday. Li Auto, AstraZeneca and MCK stock are on the IBD 50. Li Auto also was Wednesday’s IBD Stock Of The Day.

Inflation Report

The headline CPI inflation rate spiked to 9.1% in June from May’s 8.6%, a fresh 40-year high and above views for 8.8%. Core inflation, which strips out food and energy, edged down to 5.9% from 6%.

With crude oil and gasoline prices falling significantly from mid-June, headline CPI inflation might finally cool somewhat in July. But June’s broad-based price gains are an ominous sign for inflation longer term.

Core prices rose 0.7% vs. May, the third straight month of accelerating gains, on a sequential, unrounded basis. Services prices excluding energy picked up to 5.5% vs. a year earlier.

Fed Rate Hike Outlook

As a result, the CME FedWatch Tool now sees a 78% chance of a 100-basis-point Fed rate hike at the end of the July 26-27 meeting, up from 8% on Tuesday. Markets had been locked in on a 75-basis-point move before Tuesday’s inflation data.

The CPI inflation report raised the odds of a full-point hike, but they spiked higher on Atlanta Fed President Raphael Bostic. Bostic said Wednesday that “everything is in play,” explicitly affirming that “everything” includes a possible 100-basis-point move.

Cleveland Fed President Loretta Mester, regarding a percentage-point hike, told Bloomberg that “We don’t have to make that decision today.” But she stressed that the CPI report was “uniformly bad.”

For September, markets see a 75-basis-point hike as very likely, a switch from 50 basis points before the CPI inflation report.

Bottom line, markets appear to be pricing in an 175 basis points in rate hikes over the next two meetings vs. 125 basis points before the inflation data.

Also noteworthy: The Bank of Canada hiked rates by 100 basis points on Wednesday, more than expected.

Dow Jones Futures Today

Dow Jones futures fell 0.2% vs. fair value. S&P 500 futures retreated 0.3%. Nasdaq 100 futures declined 0.25%.

The 10-year Treasury yield rose 6 basis points to 2.96%. The two-year yield climbed 5 basis points to 3.19%.

At 8:30 a.m. ET, the Labor Department will release the June producer price index and weekly jobless claims. Will the PPI show any cooling in wholesale inflation? Jobless claims will remain low, but should continue to show a trend of slowly easing labor markets.

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

Stock Market Rally

The stock market rally sold off Wednesday morning on the hot inflation report, rebounded to mixed for much of the afternoon before fading.

The Dow Jones Industrial Average sank 0.7% in Wednesday’s stock market trading. The S&P 500 index declined 0.45%. The Nasdaq composite dipped 0.15%. The small-cap Russell 2000 edged down 0.1%.

U.S. crude oil prices rose 0.5% to $96.30 a barrel in an up-and-down session. Gasoline futures fell nearly 1%, with prices at the pump likely to keep sliding at least in the short run.

Treasury Yields

The 10-year Treasury yield fell 5 basis points to 2.9% after briefly spiking to 3.05% on the CPI data. Meanwhile, the two-year yield rose 10 basis points to 3.14%. The one-year Treasury yield popped 12 basis points to 3.2%.

The yield curve is now inverted from the 1-year to the 10-year, while the 2-year to 10-year inversion is the sharpest since 2000. The 6-month bill rate (up 18 basis points to 2.95%) is now above the 10-year yield rate.

All of that Treasury action is signaling rising recession risks.

ETFs

Among the best ETFs, the Innovator IBD 50 ETF (FFTY) lost 1 cent to 26.53, while the Innovator IBD Breakout Opportunities ETF (BOUT) dipped 0.2%. The iShares Expanded Tech-Software Sector ETF (IGV) slumped 1%, extending the weekly loss to 6.2%. The VanEck Vectors Semiconductor ETF (SMH) gained 0.8%.

Reflecting more-speculative story stocks, ARK Innovation ETF (ARKK) fell 0.7% and ARK Genomics ETF (ARKG) rose 1.1%. Tesla stock is one of the largest holdings across Ark Invest’s ETFs. Cathie Wood’s Ark also owns some BYD stock.

SPDR S&P Metals & Mining ETF (XME) gained 2.2% while the Global X U.S. Infrastructure Development ETF (PAVE) retreated 0.5%. U.S. Global Jets ETF (JETS) descended 0.8%. SPDR S&P Homebuilders ETF (XHB) edged up 0.2%. The Energy Select SPDR ETF (XLE) dipped 0.2% and the Financial Select SPDR ETF (XLF) lost 0.5%. The Health Care Select Sector SPDR Fund (XLV) sank 1%, with MCK stock in the ETF.

Five Best Chinese Stocks To Watch Now

Li Auto Stock

Li Auto stock rose 2.8% to 38.03, rebounding from just above the 21-day moving average, offering an aggressive entry. After more than doubling from early May to late June, LI stock has been consolidating. Ideally, the China hybrid SUV maker would form a new base, letting the 50-day line close the gap. Investors could view the current action as a handle on a consolidation going back to late 2020.

Meanwhile, Tesla stock reversed higher, climbing 1.7% to 711.12. TSLA stock reclaimed its 21-day moving average. Shares backed off from near their 50-day line. Tesla stock reclaimed that key level on Friday, but tumbling back below it on Monday.

TSLA stock fell 1% late Wednesday. Tesla AI chief Andrej Karpathy, who oversaw Autopilot, tweeted that he has left the EV giant. Karpathy had been on a months-long sabbatical, raising speculation that he was on his way out.

BYD stock edged up 0.9% to 34.80 on Wednesday, finding support at its 200-day line. Shares of the China EV and battery giant plunged 11% Tuesday on rumors that Warren Buffett’s Berkshire Hathaway (BRKB) might be selling some or all of its big BYD stake. Investors will want some clarity on that. But BYD stock needs to forge a new base.

Tesla Vs. BYD: Which EV Giant Is The Better Buy?

Stocks Near Buy Points

Shockwave Medical stock edged up 0.4% to 195.93 after sinking to 186 intraday. SWAV stock could be working on a handle starting with July 8, but needs a couple more days for that to form. That also coincides with a downward-sloping trendline entry, from the November 2021 and April peaks to July 8. The relative strength line, the blue line in the charts provided, has been hitting record highs even with SWAV stock well off all-time levels.

AstraZeneca stock dipped 0.6% to 66.30, but rebounded from an intraday test of the 21-day moving average. AZN stock is working on a 67.50 buy point from a double-bottom base. The U.K. drug giant has crossed that entry three times in recent weeks, but never closed in buy range.

MCK stock slipped 0.7% to 325.18, bouncing intraday from another 50-day test. McKesson stock has a 340.04 buy point from a flat base, but investors could use 335.67, just above Monday’s intraday high, as a slightly early entry.

Olaplex popped 6.6% to 15.31, rebounding back above its 21-day and 50-day lines. Volume was well below average for OLPX stock, but was better than the past few days. Shares are working on a 17.47 buy point from a bottoming base. Olaplex stock closed Wednesday just above a short downward-sloping trendline in that base. Along with being close to the 50-day line, that could offer an aggressive entry.

The high-end hair-care products maker came public at 21 a share in September 2021, hitting a record 30.41 just before the end of the year. But that OLPX breakout quickly fizzled, with shares plunging all the way to 11.73 on May 10. Earnings growth and estimates have remained strong, with the once-lofty OLPX stock price-to-earnings ratio down to 32.

Market Rally Analysis

The stock market rally held up relatively well Wednesday given the hot inflation reading, “everything” Fed and strong recession signals.

The major indexes came well off morning lows. Techs led the way, perhaps bouncing on the lower 10-year Treasury yield. But the long-term yield is falling on expectations that Fed rate hikes will drive the economy into a recession. That’s not exactly great news.

The major indexes are still below their 21-day lines. The 10-week line remains a major hurdle, with the Nasdaq reversing lower from that level this week.

Markets, like the economy, are in flux. The major indexes could go back to lows or rebound to test or even surpass the 10-week line again. They also could move sideways in a choppy fashion for an extended period. That would let the markets get more clarity on the economy and Fed rate hikes, while more bases could form. But in the short run, stocks could be very choppy, luring investors in and shaking them out.

The medical sector is still the clear leader, with a wide array of stocks and groups showing positive action.

Time The Market With IBD’s ETF Market Strategy

What To Do Now

The market rally is still hanging around, but under pressure. There’s no real direction over the past few weeks, while the longer-term trend remains negative.

Earnings season is about to ramp up aggressively, creating a wave of new uncertainty and volatility in the coming weeks.

It’s not a good time to be adding exposure. A few stocks, mostly medicals, are showing positive action, but even they can have some big daily swings. So consider taking at least partial profits quickly. Don’t buy extended and don’t get too invested in a particular sector or theme.

Stay engaged and be prepared. Keep working on those watchlists, looking for stocks setting up and showing relative strength.

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.

YOU MAY ALSO LIKE:

Catch The Next Big Winning Stock With MarketSmith

Best Growth Stocks To Buy And Watch

IBD Digital: Unlock IBD’s Premium Stock Lists, Tools And Analysis Today