Dow Jones futures will reopen Sunday evening, along with S&P 500 futures and Nasdaq futures, with investors looking for signs that the stock market rally will find support or keep retreat. Last week the major indexes broke through key levels, with leading stocks also struggling.
The stock market rally may be undergoing a character change. Investors need to be more cautious, perhaps reducing exposure, especially if they haven’t already done so.
The GameStop (GME) saga is likely far from over. GME stock, AMC Entertainment, Koss (KOSS), Express (EXPR) and other short-squeeze plans had another mammoth week of ultra-volatile swings. But the risks are extremely high. Investors are better served following a consistent strategy and trading rules, not taking wild bets.
China-based Tesla (TSLA) EV rivals Nio (NIO), Xpeng Motors (XPEV), Li Auto (LI) and BYD Co. (BYDDF) will report January sales in the coming days, perhaps as early as Monday. All four EV stocks suffered sharp weekly losses, with Nio stock closing slightly below a buy point. Tesla stock also retreated last week following its earnings miss.
Keep an eye on MSFT stock. Microsoft (MSFT) retreated below a buy point Friday, but closed the week with solid gains. It’s the best-looking tech titan after fellow Dow Jones component Apple (AAPL) reversed lower last week on its earnings.
Dow Jones Futures Today
Dow Jones futures will open Sunday at 6 p.m. ET, along with S&P 500 futures and Nasdaq 100 futures.
Coronavirus cases worldwide reached 102.73 million. Covid-19 deaths topped 2.21 million.
Coronavirus cases in the U.S. have hit 26.51 million, with deaths above 447,000. The actual number of Americans who have contracted Covid-19 may top 100 million.
New Covid cases are falling sharply in the U.S., with hospitalizations also tumbling. Deaths appear to have peaked as well. California has lifted restrictions on much of the state, while New York City will allow indoor dining starting on Valentine’s Day.
Coronavirus vaccinations have picked up over the several days, topping one million shots for 10 straight days. Nearly 29 million shots of the Pfizer or Moderna (MRNA) vaccine have been given as of Jan. 29. While the country is months away from herd immunity, as vaccinations expand, that should start to have a impact on the spread.
Meanwhile, more vaccines are on the way.
Novavax (NVAX) said Thursday night that its Covid vaccine was 89.3% effective in a late-stage U.K. trial But it was 95.6% effective vs. the original coronavirus strain and 85.6% effective vs. the highly contagious U.K. strain. A separate trial found that it’s 60% effective vs. a South African variant.
Johnson & Johnson (JNJ) said its one-shot vaccine is 72% effective in the U.S., but less so in trials in Latin America and South Africa. J&J fell 3.6% Friday. Novavax skyrocketed 65% to a new high. Moderna stock leapt to a high but pared its gain to 8.5%.
Stock Market Rally Last Week
U.S. Stock Market Today Overview
Last Update: 4:10 PM ET 1/29/2021
The stock market rally last week started off strong, but sold off Wednesday and Friday for big losses. Selling was broad-based.
The Dow Jones Industrial Average fell 3.2% in last week’s stock market trading. The S&P 500 index lost 3.3%. The Nasdaq composite skidded 3.5%, or 4.8% from Monday’s all-time intraday high.
Microsoft stock fell 2.9% on Friday to 231.96, back below the the 232.96 buy point, according to MarketSmith analysis. But shares still rose 2.7% for the week. That followed a 6.25% jump for MSFT stock in the prior week.
In contrast, Apple stock fell 5.1% last week, and 9% from Monday’s all-time high. Shares fell below their buy point on Thursday and through the 21-day line on Friday.
Among the best ETFs, the Innovator IBD 50 ETF (FFTY) tumbled 6.7%, while the Innovator IBD Breakout Opportunities ETF (BOUT) skidded 6.6%. The iShares Expanded Tech-Software Sector ETF (IGV) lost 2.7%, even with MSFT stock as the top component. The VanEck Vectors Semiconductor ETF (SMH) retreated 5.9%.
This is an important time to read The Big Picture.
GME Stock Won’t Stop
GME skyrocketed 400% last week and 1,625% for January. AMC stock shot up 278% for the week and 525% last month. KOSS stock erupted for an 1,816% gain last week and 1,760% for the month. Express stock rallied 235% last week and 559% in January.
But that belies enormous volatility. On Thursday, GME stock plunged 77% in less than 90 minutes from its intraday high to low.
In a game of musical chairs, you don’t want to be the one left standing. When the squeeze plays finally end, GME stock, AMC stock and others will likely come under enormous pressure.
Beating the market consistently requires a lot of hard work and sound principles. Jumping into wild story stocks is nothing like that.
China EV Sales Loom
China electric car makers Nio, Xpeng, Li Auto and BYD had a rough time last week but have boomed over the last several months, as production and deliveries skyrocket. Can the companies and stocks keep up the momentum?
All these EV makers are ramping up output as fast as they can, with pro-EV license plate policies in Shanghai and elsewhere fueling demand. So expectations are generally high for January sales.
However, some government policies may wane after February. Meanwhile, China EV supply is set to explode. In addition to Nio, BYD, Li Auto and Xpeng, many other global automakers, local giants and startups flooding the market.
Tesla is looking to double production from its Shanghai plant in 2021. Volkswagen (VWAGY) is beginning a huge EV push in China with the ID.4.
If supply starts to outstrip demand, the impact on sales and prices could be fierce.
In particular, the Nio EC6 crossover faces competition from the Tesla Model Y and the upcoming VW ID.4. The made-in-China Model Y, which began deliveries last month, is slightly cheaper than the EC6. Meanwhile, the soon-to-launch made-in-China ID.4 is $20,000 cheaper than the Model Y.
Nio Stock, Tesla Stock
Nio stock fell 8% last week to 57, just below a 57.30 buy point. Shares could end up forming a new consolidation with a 67.09 entry.
Li Auto stock sank 6.4% and Xpeng stock nearly 15%, both closing slightly below now-declining 10-week lines. Investors should probably wait for Li and XPEV stock to retake late January highs before starting a position.
BYD stock lost 8.2%, reversing from record highs to about its 21-day line. The profitable EV and battery maker is extended from a buy zone.
Tesla stock fell 6.3% last week after earnings missed and core margins came in well below views. Shares closed below their 21-day line for the first time since Nov. 16, when news broke late that Tesla stock would join the S&P 500 index. The TSLA stock chart doesn’t look damaged, but it also doesn’t have a reasonable buy point in sight. Tesla stock likely needs to forge a new base or rebound from its 50-day or 10-week line before investors start or add to a position.
Stock Market Rally Analysis
The stock market rally suffered serious losses on Wednesday and Friday, with earnings and guidance from Apple, AMD, Facebook and Tesla among the catalysts. But to understand last week’s retreat you have to start at the beginning. On Monday, stocks briefly sold off, then rebounded to end at new highs.
But the Nasdaq closed 8.2% above its 50-day moving average, the biggest gap since early September.
When the Nasdaq is more than 6% above its 50-day line, the risks of a pullback are relatively high. The more the Nasdaq gets extended, the higher the odds a pullback will be larger.
Of course, as the late August frenzy showed, the Nasdaq can get even more extended, but the goal is to play the odds, not try to top-tick every rally. (Besides, the late August-early September run-up ended very abruptly.)
Think of it this way. Investors should buy in confirmed market uptrends because, on balance, the broader market and most stocks should trend up. But when the Nasdaq is extended, the odds that the market will continue to trend up are lower, at least temporarily.
Monday was a day where you could have been defensive. It was definitely a signal to take the foot off the gas a little bit. Selling into strength, cutting laggards, being wary of new buys and trimming overall exposure somewhat were all prudent steps.
Taking those action could have better prepared you up for later in the week. After Tuesday’s quiet session, the stock market rally suffered a significant sell-off on Wednesday, with AMD spurring selling in many chip names. The Nasdaq fell to its 21-day exponential moving average, while the S&P 500 undercut that level. The Dow Jones dropped all the way to its 50-day line.
On Thursday, the stock market rally rebounded, but gains faded in the late afternoon, especially on the Nasdaq. Apple stock and Facebook reversed lower, but it was also a sign that the market may not rush to new highs.
On Friday, the stock market rally tried to erase early losses, but soon sold off through Wednesday’s lows. Apple again was a problem, but so were Facebook, Lam Research and Tesla stock.
The Nasdaq plowed below its 21-day line, closing below its key level for the first time since Nov. 3. The S&P 500 closed just below the 50-day line, while the Dow sharply undercut that level.
What’s Next For The Market Rally?
Can the Nasdaq reclaim its 21-day line while the Dow and S&P 500 find support at the 50-day line? Or will the Nasdaq drop to or even below its 50-day?
Remember, even if the stock market rally regains old highs in the near future, that doesn’t mean all leaders will follow. Software stocks have slumped for a few weeks. Cyclicals reversed hard the past couple of weeks. Chip-equipment names sold off hard in recent days.
Ideally, the stock market would move sideways for a few weeks, letting the major indexes ride their 50-day lines for a time. Leading stocks would set up in new bullish bases or pull back gracefully to their 50-day or 10-week lines.
What You Should Do Now
Investors should be more defensive after this past week. You may want to take some more profits, cut losers loose and generally reduce exposure, especially if you didn’t so last week. So analyze your current holdings. What are your must-holds and which are lower tier?
Game plan for the week ahead. If the market closes below last week’s lows, that would be a bad sign. What will you do with your stocks at various points?
Yes, the stock market rally could race right to new highs. It’s still a market uptrend and not a correction. But the investing climate is not as favorable right now as it was in November or after the post-crash April follow-through day. Staying invested but not reckless is prudent to preserve your capital and your psyche.
Please follow Ed Carson on Twitter at @IBD_ECarson for stock market updates and more.
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