Dow Jones futures were steady late Tuesday, along with S&P 500 futures and Nasdaq futures. The stock market rally technically was mixed Tuesday, but tech stocks suffered significant losses. Treasury Secretary Janet Yellen after the close tried to walk back earlier comments when she said interest rates may have to rise “somewhat.”
The Nasdaq tumbled intraday to its 50-day line while the Russell 2000 closed right at that key level. Trillion-dollars stocks Apple (AAPL), Amazon.com (AMZN), Microsoft (MSFT) and Google parent Alphabet (GOOGL) sold off. So did Nvidia (NVDA) and other chip names, ServiceNow (NOW), Adobe (ADBE) and other software plays tumbled as well as Tesla (TSLA) and other EV makers.
On the upside, steel and mining stocks such as Steel Dynamics (STLD) generally did well. Agricultural, transportation, housing, retail groups generally held up, along with oil groups and financials such as Goldman Sachs (GS).
The Dow Jones managed to eke out a tiny gain. The S&P 500 fell modestly, but held support at its 21-day exponential moving average, even with big-cap techs like Apple stock dragging down the benchmark index.
Bottom line, the stock market rally once again looks split, with tech and growth names looking weak while old economy names are doing well.
Yellen Warns Of Higher Interest Rates
Treasury Secretary Yellen conceded that the Federal Reserve may have to hike interest rates as the government unleashes further massive spending.
“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat,” Yellen said at an economic seminar.
After the stock market close, Yellen tried to walk back her “somewhat” comment, at least somewhat. She said she’s “not predicting or recommending” rate hikes. Yellen added that she’s not concerned about inflation.
The U.S. government has spent $5.3 trillion on Covid-related stimulus since March 2020, including a $1.9 trillion package passed soon after President Biden took office. Thanks to heavy government spending as coronavirus vaccinations, the U.S. economy is rapidly rebounding, nearly eclipsing pre-pandemic peaks in the first quarter. Job growth is booming, too.
But the Biden administration is pushing for another $4 trillion in spending. President Biden has proposed funding those two packages with tax hikes on top earnings, including nearly doubling the capital gains tax rate, as well as corporate tax increases.
Tax hikes targeting corporations and capital gains, along with higher interest rates, would likely be negative headwinds for the stock market.
Yellen ran the central bank before current Fed chief Jerome Powell. Powell and current policymakers have signaled they want to see much-further economic strength before even talking about curbing asset purchases, with rate hikes far down the road. But Yellen’s comments raise expectations that “taper talk” could start at the June Fed meeting.
On Tuesday, however, the 10-year Treasury yield fell modestly.
Adobe, Microsoft, Nvidia, ServiceNow and Google stock are all on IBD Leaderboard. Adobe, ServiceNow and Microsoft stock are IBD Long-Term Leaders. Steel Dynamics and Goldman stock are on SwingTrader. Goldman Sachs and Tesla stock are on the IBD 50.
Apple, Microsoft and Goldman stock are on the Dow Jones Industrial Average.
Dow Jones Futures Today
Dow Jones futures edged lower vs. fair value. S&P 500 futures were about unchanged. Nasdaq 100 futures lost 0.1%.
Coronavirus cases worldwide reached 154.92 million. Covid-19 deaths topped 3.23 million.
Coronavirus cases in the U.S. have hit 33.26 million, with deaths above 592,000.
Stock Market Rally
The stock market rally had a mixed session, but you’d have to be an optimist to see the glass as half full Tuesday.
The Dow Jones Industrial Average closed at session highs, just above break-even in Tuesday’s stock market trading. The S&P 500 index gave up 0.7%. The Nasdaq composite tumbled 1.9%, though it pared losses to finish slightly above its 50-day moving average. The major indexes fell from the open, with intraday lows coming after Yellen’s interest rates comments.
Big Cap Techs Slump
Apple plunged 3.5%, finding support at its 50-day. Amazon stock slid 2.2%, falling further below buy points. Microsoft stock sank 1.6%, testing a recent buy point. Facebook (FB) and Google stock lost 1.3% and 1.55%, respectively, though their charts look better.
Adobe stock fell 2.5%, tumbling toward its 50-day and 200-day lines. NOW stock retreated 1.4%, down 14.1% over the last five sessions since earnings. ServiceNow is starting to lose sight of its long-term averages.
Tesla stock fell 1.65% to 673.60 on Tuesday, back through its 50-day after slumped 3.5% on Monday. TSLA stock no longer has a 780.89 buy point because the midpoint of the handle is now below the midpoint of the base. Tesla stock is now significantly below its March highs.
Among the best ETFs, the Innovator IBD 50 ETF (FFTY) retreated 1.45%, while the Innovator IBD Breakout Opportunities ETF (BOUT) sank 1.9%. The iShares Expanded Tech-Software Sector ETF (IGV) tumbled 2.4%, with Microsoft, Adobe and ServiceNow stock notable components. The VanEck Vectors Semiconductor ETF (SMH) fell 1.2%, though it slashed intraday losses. Nvidia stock is a major SMH holding.
Reflecting more-speculative story stocks, ARK Innovation ETF (ARKK) tumbled 3.55%, testing its 200-day line for the first time since April 2020. ARK Genomics ETF (ARKG) skidded 3.1%. Tesla stock is the largest holding for Cathie Wood’s ARK Investments. But ARK-type stocks have been struggling generally with Wood often stepping up stakes as they tumble.
Market Rally Analysis
The stock market rally has weakened considerably over the last few sessions. After a few weeks where the market rally showed some broad strength, it has returned to the bifurcated rally of March.
The Nasdaq found support at its 50-day line and below the mid-March high. Titans such as Apple and Amazon, which had masked underlying weakness in the tech sector until recently, were no refuge Tuesday. Chip stocks, which were the first tech sector to pick up, have been lagging for a few weeks and look increasingly damaged. Software such as ServiceNow and Adobe stock, which were just starting to look promising in late April, have fallen sharply over several sessions. Tesla stock needs the repair shop again, and it’s in better condition than other EV makers.
It’s a far-different picture for the Dow Jones and S&P 500. The Dow managed to eke out a gain, even with megacaps such as Apple stock weighing on blue caps. The S&P 500 found support at its 21-day line, even with losses from Apple, Amazon, Nvidia, Tesla stock and more.
Holding the 50-day line will be critical for the Nasdaq and Russell 2000. But even they can, growth stocks — many of which never mounted a real comeback — need significant time to recover.
What To Do Now
Investors should be reducing their exposure to tech and growth names. Many have tripped automatic sell signals or roundtripped gains. If you have longer-term big winners in growth names, consider reducing your stakes to core positions.
For buying opportunities, housing- and commodity-related plays have been working, along with financials, shipping plays and some industrials. These are benefiting from a booming economy
Look for the real leaders, buying them on sound breakouts or bullish pullbacks. Rio Tinto (RIO), Caterpillar (CAT), Deere (DE), FedEx (FDX), Nutrien (NTR), Goldman stock, Granite Construction (GVA) and Azek (AZEK) are in or near buy zones.
Rio Tinto and Granite Construction are among the David Ryan’s “SIR DOG” list of stocks to watch that he highlighted on Tuesday’s IBD Live, definitely an episode worth watching again.
But, with the market rally split once again, investors should be careful about being too exposed. Perhaps the old economy names will lead and tech names will at least shore up. But there is a danger that the Nasdaq and Russell 2000 will drag down the stronger sectors, turning a split market rally into a full-on correction.
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