Dow Jones futures rose modestly vs. fair value Monday morning, paring solid Sunday losses. S&P 500 futures fell modestly and Nasdaq futures declined sharply after a whipsaw stock market sell-off last week. Tesla stock is likely to fall sharply after not getting an invite to the S&P 500 index.
he stock market rally had flashed warning signs in the days leading up to last week's sharp sell-off, fueled by the Tesla (TSLA) and Apple stock splits as well as Salesforce.com (CRM) and Zoom Video (ZM) earnings. By Wednesday, many top software and other tech leaders were going vertical, including Adobe (ADBE), Netflix (NFLX) and Nvidia (NVDA), pushing the Nasdaq composite to hit several levels indicating a high risk of a pullback.
The stock market rally sold off sharply Thursday but found support Friday and slashed intraday losses. But top stocks suffered heavy damage, with big outside negative weeks and many tumbling through key support. Recent buys flailed or failed.
There are three ways the stock market rally could go from here. But in each of these cases, investors should be cautious about any new buys — aside from swing trades — and still consider some further profit taking. But build watchlists of stocks holding up well, such as Intuitive Surgical (ISRG) and Taiwan Semiconductor (TSM). When the dust settles and the market looks favorable, you want to be ready.
Tesla Stock Won't Join S&P 500 Index
Along with its five-for-one stock split, Tesla has rallied in recent weeks in anticipation that it would join the S&P 500. That would spur index mutual funds and ETFs to acquire big stakes in the electric car maker, giving TSLA stock a pop.
But late Friday, S&P Dow Jones Indices declined to add Tesla to the S&P 500 index. Instead, the S&P 500 will add Etsy (ETSY), Teradyne (TER) and Catalent (CTLT).. They will replace H&R Block (HRB), Coty (COTY) and Kohl's (KSS), which are dropping to the S&P MidCap 400.
It's unclear why Tesla wasn't included. The stock could be added to the benchmark index at a later date.
Tesla stock fell 6.4% late Friday, after rebounding to close the session up 2.8%.
Etsy, Catalent and Teradyne stock all gained late Friday. Catalent stock had closed the week just below its 50-day line while Etsy finished 4.3% under that key level and Teradyne 8.7%.
Tesla is on IBD Leaderboard, along with Apple, Adobe, Netflix, Nvidia and Intuitive Surgical stock. Adobe stock and Salesforce are on IBD Long-Term Leaders. Nvidia, Adobe, Netflix stock are on the IBD 50.
Dow Jones Futures Today
Dow Jones futures were 0.2% above fair value, while S&P 500 futures lost 0.15%. Nasdaq 100 futures sank 1.35%, with TSLA stock a major drag. But that would still indicate the Nasdaq would open well above its 50-day moving average.
While DJIA futures trade Sunday and Monday, U.S. stock markets are closed Monday for the Labor Day holiday. Other stock exchanges around the world will be open.
Remember that overnight action in Dow futures and elsewhere doesn't necessarily translate into actual trading in the next regular stock market session.
Coronavirus News
Coronavirus cases worldwide have reached 27.31 million. Covid-19 deaths are above 893,000.
Coronavirus cases in the U.S. have hit 6.46 million, with deaths topping 193,000. New U.S. Covid-19 cases on Friday hit the highest since Aug. 15.
India now has 4.2 million coronavirus cases, continuing to set records for new daily cases for any country. India has surpassed Brazil as No. 2 behind the U.S. Russia is fourth with just over one million.
Many European countries are reporting their most new cases in months, including France and U.K.
Coronavirus Stock Market Rally Last Week
The coronavirus stock market rally had a wild week.
The Dow Jones Industrial Average fell 1.8% in last week's stock market trading. The S&P 500 index sank 2.3%. The Nasdaq composite lost 3.3% for the week after running up to a record high on Wednesday.
Big techs suffered weekly losses, but the damage was worse because of the big gains early in the week. Apple stock lost 3.1% for the week, but plunged 8% on Thursday. Adobe slid 4.7%, Salesforce just over 6%, Nvidia 4%. Netflix dipped 1.5% but at Friday's losses had erased all of its late August spike.
Tesla fell 5.5% for the week, but that's after surging 13% on Monday and recovering from further losses on Friday.
Zoom Video stock skyrocketed 24%, but actually closed in the lower half of its range.
Among the best ETFs, the Innovator IBD 50 ETF (FFTY) sank 4%. The iShares Expanded Tech-Software Sector ETF (IGV) plunged 5.5%, with Adobe and Salesforce stock top holdings. The VanEck Vectors Semiconductor ETF (SMH) lost just 2.4%, but reversed sharply from Wednesday's high as Nvidia stock and others had big outside weeks.
Stock Market Rally Melt Up
The stock market rally had flashed increasing warning signs leading up to Thursday's sell-off. After a three-day pullback ending Aug. 11, the Nasdaq took off for several weeks. The catalyst was the somewhat-bizarre euphoria surrounding the Tesla stock split, adding to the Apple stock split momentum. Strong earnings and huge stock gains from Salesforce, Workday (WDAY) and finally Zoom Video triggered a final frenzy, pushing a wide swathe of software stocks sharply higher, along with the likes of Facebook, Google, Netflix and Nvidia. The cherry on top was a number of big price targets to leading stocks on Wednesday.
SoftBank reportedly made big option bets in leading large-cap techs last month, along with many retail investors, possibly explaining the scope of the stocks' gains.
Finally, the Nasdaq on Wednesday hit the top of a regression line on a daily chart and the top of a channel line on a weekly chart. The tech-heavy index had pulled back multiple times during the current rally after getting to those levels. The Nasdaq also was increasingly extended from moving averages, including the 50-day moving average. Even the S&P 500 index, dominated by big techs, was started to look extended from its 50-day line.
The Stock Market Sell-Off
On Thursday the Nasdaq sold off hard, closing near lows just above its 21-day moving average, the key area of support during the current stock market rally. On Friday morning, the Nasdaq plunged through its 21-day line to just above its 50-day line. That was also near the top of its July mini-consolidation, another natural area of support.
The Nasdaq and the other major indexes rebounded bullishly, slashing losses, though fading again somewhat at the close. The Nasdaq closed below its 21-day line, but not too far.
Stock Market Direction Unclear
There are three ways the stock market rally could go from here. It could rebound quickly to all-time highs. It could move sideways using last week's wild week as a trading range. Or it could sell off further. But in all three cases, investors should be cautious about making new buys and still considering some profit taking.
If The Stock Market Rally Runs Back To Highs
Several times during this resilient stock market rally, the indexes will fall for a day or two, sometimes violently, but then rebound. That could happen again. But if the Nasdaq does run to new highs in the next few days, it would quickly look extended once again, making a double-dip pullback likely.
That's what happened in June and July. Short, sharp Nasdaq pullbacks to the 21-day line followed by a rally into new highs, only to retreat to the 21-day again before moving higher.
Also, there's no guarantee that the steep stock market rally ascent will continue. The Nasdaq defied expectations for a slower pace after Aug. 11 due to the Apple-Tesla-Zoom frenzy, but in the long run a more-gradual ascent would be more sustainable. Also note: The Nasdaq composite is still extended from a trend line going back to 2010 on a monthly chart. A slower ascent now would bring that in line over time.
But that would also mean a lower effective ceiling on the Nasdaq going forward.
So in this seemingly bullish quick-rebound scenario, there's likely little room for new buys, aside from swing trades, to make headway before the market stepped back again.
Also there aren't many great buying opportunities out there. Hopefully investors have dumped any losing stocks and taken substantial profits. But you may want to continue to do so, grading your stocks and deciding to hold only your big winners that you have conviction in.
If The Stock Market Rally Continues To Slide
In this scenario, the Nasdaq falls back to and perhaps through its 50-day line in a longer pullback or even a correction.
In this case, new buys almost certainly won't work. You'll want to take even more profits, reducing exposure more substantially.
You can never rule out that the rally will be done for a substantial time, so you don't want to watch huge stock market rally gains whittle away.
The good news is that if there is a long pullback or correction, the stock market rally will have more room to run when the trend improves. Leading stocks will form new bases and buying opportunities.
If The Stock Market Rally Moves Sideways
This might be the ideal situation: The Nasdaq uses last week's highs and lows as a trading range for several weeks. That would eventually give the market rally some room to run and let new bases and buying opportunities develop.
You would still want to keep analyzing your holdings and judging which should stay. Without a powerful market trend behind it, some holdings may start to weaken further. But overall big winners should do reasonably well in a sideways market, perhaps forming new bases to offer add-on opportunities in the next market move higher.
New buys would struggle in a choppy market.
Stay Engaged
Investors should remain engaged, paying close attention to the major indexes and leading stocks. This long weekend is good time to evaluate your trades from the stock market rally, grade your current holdings, and identify potential winners for the next remain.
Reprinted from yahoofinance, the copyright all reserved by the original author.
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