Dow Jones futures fell sharply Wednesday morning, along with S&P 500 futures and especially Nasdaq futures, while the Bitcoin price tumbled to fresh lows. Target stock rose on strong earnings, signaling a buying opportunity.
The stock market rally retreated Tuesday, with the major indexes finishing at the worst levels of the day. The Dow Jones and S&P 500 fell below their 21-day lines. The Nasdaq and Russell 2000 hit resistance at their 50-day moving averages. Once again, new breakouts fizzled.
The tech-heavy Nasdaq rose for much of the session, even as Apple (AAPL), Microsoft (MSFT), Facebook (FB), Google (GOOGL) and Amazon (AMZN) retreated slightly. The biggest gains were among beaten-down 2020 winners such as Palantir Technologies (PLTR), Peloton Interactive (PTON), Snowflake (SNOW) and Zoom Video (ZM).
Tesla stock, another former leader, saw modest gains almost fade away, hitting key resistance once again.
Tesla has produced more than 10,000 electric vehicles reportedly that are on hold because of a missing part, creating what a report called a “logistical nightmare” for the EV giant. Automotive chips, in short supply worldwide, are the likely culprit. It’s part of a range of bad news for the highly valued automaker.
Target Earnings Strong
Target (TGT) reported much-better-than-expected Q1 results early Wednesday. Target earnings leapt 525% and sales 23%. Target stock rose 3% early Wednesday, signaling a bullish bounce from its 10-week moving average and offering a buying opportunity, according to MarketSmith analysis. On Tuesday, TGT stock fell modestly to its 10-week line, closing next to a recent three-weeks-tight pattern.
Bitcoin Price Hits New Lows
The Bitcoin price plunged again overnight, tumbling to $36,219.49 early Wednesday, the lowest since early February, before paring losses to above $38,000. Bitcoin peaked at $64,829.14 on April 16, though most of the losses happened after May 8.
Chinese regulators on Tuesday stepped up their warnings, saying financial institutions should not accept cryptocurrencies as payment.
The cryptocurrency has come under heavy selling since late Wednesday, when Elon Musk said Tesla would no longer accept Bitcoin for buying its electric vehicles, citing environmental concerns. Musk, who had praised Bitcoin for months as Tesla bought $1.5 billion worth of the digital asset, followed up with more Bitcoin-critical tweets in the following days.
Other cryptocurrencies sold off hard, including Ethereum and Musk fave Dogecoin.
COIN stock tumbled 6% before the open, signaling yet another record low since its April 14 debut. Coinbase stock fell 3.7% to 239 on Tuesday. Coinbase (COIN) late Monday said it would sell $1.25 billion worth of convertible debt. The cryptocurrency exchange recently reported massive earnings and revenue growth, but slightly missed views and warned of growing competition in crypto trading. COIN stock hit 429.54 in its April 14 direct listing debut but closed at 310, continuing a steady decline since then.
Microsoft and Google stock are on IBD Leaderboard. Microsoft stock is on IBD Long-Term Leaders.
Dow Jones Futures Today
Dow Jones futures fell 0.85% below fair value. S&P 500 futures retreated 1% and Nasdaq 100 futures lost 1.4%.
Remember that overnight action in Dow futures and elsewhere doesn’t necessarily translate into actual trading in the next regular stock market session.
Among the best ETFs, the Innovator IBD 50 ETF (FFTY) slumped 1.75%, while the Innovator IBD Breakout Opportunities ETF (BOUT) retreated 1.5%. The iShares Expanded Tech-Software Sector ETF (IGV) closed just below break-even as beaten-down software rallied, offsetting top component MSFT stock. The VanEck Vectors Semiconductor ETF (SMH) slid 0.55%.
SPDR S&P Metals & Mining ETF (XME) retreated 1.8% and Global X U.S. Infrastructure Development ETF (PAVE) lost 1.9%. U.S. Global Jets ETF (JETS) edged up 0.1%, paring solid morning gains. SPDR S&P Homebuilders ETF (XHB) slumped 2.3%, as weak housing start figures helped spur fresh losses in the broader housing sector.
Reflecting more-speculative story stocks, ARK Innovation ETF (ARKK) rose 2% and ARK Genomics ETF (ARKG) 1.4%. Both remain below their 200-day moving averages. Tesla stock is the No. 1 holding for ARK Invest’s ETFs. Palantir and COIN stock also are ARK holdings.
Tesla Chip Woes?
The EV giant has produced between 10,000-20,000 Model 3 and Model Y vehicles that are in a “containment hold,” according to pro-Tesla site Electrek, citing sources. The vehicles reportedly are missing an unnamed part. Chip shortages are a likely culprit. Unlike nearly every automaker, Tesla hasn’t given clarity on its chip supply or any potential production impact, only saying that it’s a serious issue.
Chip woes could turn Tesla’s normal end-of-quarter delivery rush into a logistical nightmare. Tesla is shipping nearly finished vehicles to delivery centers because there isn’t room at its Fremont factory.
Last month, Tesla suffered a a 67% China sales drop in April vs. March. It’s unclear if that reflects Chinese consumer backlash, chip-related production constraints, or both. China has been the main driver of Tesla’s sales growth over the past year.
In China, a Tesla Model X on Monday hit two police officers dealing with a highway accident, killing one of them. It’s unclear if Autopilot was involved, but the incident was amplified once again on state-owned media.
California’s DMV is probing whether Tesla is making false self-driving claims about Autopilot and Full Self Driving, the Los Angeles Times reported Monday. Tesla has told the state DMV that FSD is a Level 2 driver-assist system and will remain so, despite Elon Musk’s claims for years that the automaker is *this close* to Level 5 autonomy.
A regulatory crackdown on Tesla’s driver assist programs could tarnish the company’s brand and undermine a key revenue source. Tesla charges $10,000 for FSD, with hopes for a monthly subscription as well.
Tesla stock rose 0.2% on Tuesday to 577.87, just clinging to a gain after briefly reclaiming its 200-day line. TSLA stock is starting to lag other EV stocks and highly valued growth names after generally looking better than them in recent months.
Shares are down nearly 19% so far this month.
Tesla stock fell nearly 3% before Wednesday’s open.
Buying Beaten-Down Stocks
Tesla stock’s recent woes coincide with similar moves by other beaten-down former leaders, including Palantir, Zoom Video, Snowflake and PTON stock. But these stocks, unlike Tesla, have trended higher over the last few sessions. SNOW stock popped 5.1% Tuesday, closing just below its 50-day line. Zoom stock also hit resistance at its 50-day.
Investors should be extremely cautious about buying such stocks, even when they reclaim key moving averages or break trend lines. Could they work? Sure. Beaten-down stocks that ultimately return to record highs have to start somewhere. If you bet correctly, you’ll get a super-low cost basis. But these stocks could easily stop bouncing and reverse lower yet again.
And when they fall, highly valued growth stocks tend to fall hard.
Palantir stock is on its fourth mini-bounce since plunging from late January to early March. Each time, PLTR stock looked like it was starting to get a little momentum only to turn lower once again.
It’s better to wait for stocks to rebound significantly, building the right side of bases and breaking out of a proper buy point. Keep in mind that all of these stocks — except Tesla — fell at least 40% from their highs. Breakouts from such deep bases are less likely to succeed. The fact that PTON stock, SNOW stock and more have had such huge drops while the broader market has been hitting new highs underscores the problem.
Market Rally Analysis
The stock market rally had a disappointing session, especially with the way Tuesday finished. The Dow Jones and S&P 500 fell below their 21-day lines and aren’t too far from their 50-day averages. They aren’t far from all-time highs either. But Dow futures suggest both will come close to their 50-day lines again.
The Nasdaq composite and small-cap Russell 2000 are hitting resistance at their 50-day lines. Futures suggest both indexes may near last week’s lows.
The Dow, S&P 500 and Nasdaq suffered another distribution day after the S&P 500’s distribution Monday.
The Nasdaq’s Power Trend is looking shaky, with the 21-day exponential moving average poised to undercut the 50-day line.
While hard-hit former leaders such as Snowflake and Zoom stock were tech standouts Tuesday, chip-gear stocks and titans such as Google edged lower.
Airline stocks and fertilizer makers had decent early gains, flashing some buy points, but faded somewhat. Miners, metals and banks edged lower, while energy stocks retreated with crude oil prices.
What Investors Should Do Now
For investors, the market rally isn’t offering many reasons to boost exposure. The major indexes are quiet while sector rotation takes place.
Most importantly, breakouts and bullish rebounds are scarce and still prone to failure. Maravai LifeSciences (MRVI), SM Energy (SM) were among several breakouts that fizzled Tuesday.
But all of this could change quickly. In the summer of 2019, the stock market struggled. It was chop, chop, chop for an extended period until finally in October the market rally revitalized and went on a strong, steady run for several months to the February 2020 top.
So whether you are partially invested or even all in cash, stay engaged. Keep building those watchlists, focusing on stocks with strong relative strength. When the stock market rally clearly is on the upswing, you’ll be ready to jump into the leaders.