Dow Jones Futures: Market Rally Bends, Doesn’t Break, But Now Faces Key Test

Dow Jones futures rose slightly Sunday night, along with S&P 500 futures and Nasdaq futures. The stock market rally fell last week, but the major indexes slashed losses by Friday’s close, with the Nasdaq once again facing a big hurdle.




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Dow Jones component UnitedHealth (UNH) soared into a buy zone Friday on strong earnings, propelling other health insurers past buy pointsincluding Centene (CNC) and Humana (HUM). Option Care Health (OPCH) and Shockwave Medical (SWAV) also jumped into buying areas.

It’s a big week for EV giants Tesla (TSLA) and China’s BYD (BYDDF). Tesla earnings are due Wednesday night, with investors looking to see how the automaker weathered Covid shutdowns and other headwinds last quarter. BYD, which announced booming preliminary first-half earnings this past week, will begin sales of the Seal sedan, a Model 3 rival, on Monday. Both Tesla stock and BYD fell significantly last week, and need time to repair.

Chip stocks are nowhere near being actionable. But they are showing some signs of strength amid a long, painful downtrend. That’s a positive sign for a sustained market rally.

UNH stock is on IBD Leaderboard. UnitedHealth and CNC stock are on the IBD 50. HUM stock is on the IBD Big Cap 20. Option Care Health was Friday’s IBD Stock Of The Day. The video embedded in the article discussed the market action and analyzed UnitedHealth, Option Health Care and SWAV stock.

Dow Jones Futures Today

Dow Jones futures rose 0.15% vs. fair value. S&P 500 futures climbed 0.2% and Nasdaq 100 futures gained 0.4%.

Crude oil prices fell slightly.

Remember that overnight action in Dow futures and elsewhere doesn’t necessarily translate into actual trading in the next regular stock market session.


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Stock Market Rally

The stock market rally fell for most of the week, but recovered most of its losses by the end.

The Dow Jones Industrial Average dipped 0.2% in last week’s stock market trading. The S&P 500 index sank 0.9%. The Nasdaq composite retreated 1.7%. The small-cap Russell 2000 fell 1.4%.

The 10-year Treasury yield tumbled 17 basis points to 2.93%. The two-year Treasury yield rose 5 basis points to 3.12%. The inverted Treasury yield curve from the two-year to 10-year is a recession warning, but it’s a little less inverted than mid-week. The 1-year yield, which moved above the two-year yield for much of the week, closed at 3.1%.

US crude oil futures tumbled 6.9% to $95.78 a barrel last week, even after bouncing quite a bit from Thursday’s lows.

ETFs

Among the best ETFsthe Innovator IBD 50 ETF (FFTY) sank 0.9% last week, while the Innovator IBD Breakout Opportunities ETF (BOUT) dipping 0.6. The iShares Expanded Tech-Software Sector ETF (IGV) tumbled 4.4%, with a ServiceNow (NOW) warning taking a toll on the sector. The VanEck Vectors Semiconductor ETF (SMH) popped nearly 3%.

SPDR S&P Metals & Mining ETF (XME) edged down 0.1% last week. The Global X US Infrastructure Development ETF (PAVE) gained 1 cent. US Global Jets ETF (JETS) ascended 1.4%. SPDR S&P Homebuilders ETF (XHB) rose 0.5%. The Energy Select SPDR ETF (XLE) slumped 3% and the Financial Select SPDR ETF (XLF) shed 0.9%. The Health Care Select Sector SPDR Fund (XLV) dipped 0.4%, rebounding late in the week. UNH stock is a major XLV stock holding.

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Reflecting more-speculative story stocks, the ARK Innovation ETF (ARKK) plunged 5.9% last week and ARK Genomics ETF (ARKG) plunged lost 2.9%, with software and highly valued growth struggling. Tesla stock is a major holding for Ark Invest’s ETFs. Cathie Wood’s Ark also owns some BYD stock.


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Stocks In Buy Zones

UnitedHealth earnings easily beat second-quarter views early Friday. UNH stock jumped 5.4% on Friday to 529.75, bouncing above a 518.80 buy point from what’s either a cup-with-handle base or a double-bottom base with a handle. For much of the week, UnitedHealth stock fell, testing its 50-day line Thursday before rebounding for a slim gain. The relative strength linethe blue line in the charts provided, is at a record high, reflecting UNH stock’s strong outperformance.

UnitedHealth earnings also lifted rivals. Centene stock popped 4.55% to 89.66, back above an 87.44 double-bottom buy point, according to MarketSmith analysis. Humana stock climbed 3.2% to 487.54, reclaiming a 475.54 entry. Both Centene and HUM stock reported earnings later this month.

Option Care stock leapt 7.7% on Friday to 31.58 in heavy volume. That cleared a 31.18 cup-base buy point. But the better entry was 30.41, just above a not-quite handle. The RS line for OPCH stock has surged into new highs. Option Care Health earnings are due July 27.

Shockwave stock rallied 5.2% to 209.90 on Friday, clearing a not-quite handle that offered an early entry of 208.28. That SWAV stock entry also coincides with a long trendline from the November peak. The RS line is already at a new high, even with Shockwave well off highs. However, Friday’s low volume wasn’t ideal.

Tesla Earnings Loom

Tesla earnings are due on Wednesday night. The second quarter was marred by a lengthy Shanghai plant closure due to the city’s Covid lockdown, followed by a lengthy recovery to full production. The Berlin and Austin factories have had a slow ramp up as well. Still, analysts expect Tesla earnings to rise 26% vs. a year earlier, although that will end a five-quarter string of triple digit growth. Sales growth should cool to a 42% annual gain. Both EPS and revenue are expected to fall significantly vs. Q1.

Investors will be looking ahead for guidance for the rest of the year, as well as any hints of future products. CEO Elon Musk said Friday that Tesla vehicle prices, which have soared over the past year, could come down if commodity costs fall.

Tesla stock fell 4.3% to 720.20 last week, slipping just below the 50-day line but holding above the 21-day line. Arguably, TSLA stock has forged a bottoming base, but there isn’t much of a prior uptrend from the May lows.

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BYD Seal Of Approval?

The BYD Seal will go on sale officially on July 18. The Model 3 rival, with boasts similar range and dimensions but for $10,000 cheaper, will likely begin deliveries a few days later.

Preorders for the Seal, which began in late May, are reportedly very high.

While Tesla and BYD both can lay claim to the EV crown, this is the first clear case of the automakers going head to head. It won’t be the last. BYD is expected to launch the Sea Lion, a Model Y crossover rival, later this year.

BYD stock plunged 8.6% to 37.74 last week. Shares tumbled on rumors that Warren Buffett’s Berkshire Hathaway (BRKB) was selling some or all of its big, long-time BYD stake. There has been no confirmation of that so far.

BYD stock actually rebounded well off weekly lows of 32.91 after the EV and battery giant reported booming preliminary earnings for the first half that were far above expectations. Analysts expect even-stronger profits and margins in the second half as production continues to race higher and BYD moves into higher-priced, higher-margin vehicles.

Still, the BYD stock chart needs some time to repair and forge a new base.


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


Market Rally Analysis

Ultimately, the major indexes finished with slim-to-modest losses, but it wasn’t a quiet week.

The stock market rally got off to a bad start, with the Nasdaq falling back Monday from its 10-week line, where it’s hit resistance multiple times. The major indexes kept sliding, but did manage to rebound well off lows Wednesday and Thursday, despite white-hot inflation reports that raised the odds of even-bigger Fed rate hikes. On Friday, stocks bounced strongly, with the Nasdaq, Dow Jones and S&P 500 retaking their 21-day lines.

Despite some big swings, the Nasdaq actually had an inside week and continues a recent streak of higher lows, although the other indexes briefly undercut the previous week’s lows.

The Nasdaq is once again close to its 50-day and 10-week averages. Will the tech-heavy composite once again turn tail near these levels? A decisive move above the 10-week — which would probably also mean clearing the late June/early July peaks — would be a positive signal. But there would still be several other key resistance levels along the way.

For now, the market rally remains under pressure, rangebound and highly volatile. It’s a tricky time to be investing.

The macroeconomic climate remains difficult. Wednesday’s CPI report was grim, with a scary headline figure and details suggesting last inflationary pressures even as gasoline prices come down. Friday’s economic data was more upbeat. June retail sales and the New York Fed’s Empire State manufacturing index for July were stronger than expected. Crucially, import prices, price gauges in the Empire factory survey and inflation expectations all bode well for future inflation. Markets expect another Fed rate hike of 75 basis points on July 27 with the odds of a full-point move below 30% from roughly 80% on Wednesday.

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The medical sector remains the key area of ​​market strength. While some names wobbled midweek, many rebounded from key levels Thursday while UNH earnings buoyed rivals and others on Friday.

Discount retailers are looking healthy.

More broadly, there are some glimmers of hope and encouraging green shoots. Weak earnings and guidance helped push stocks lower early in the week while strong results, including from UnitedHealth, Taiwan Semiconductor (TSM) and Citigroup (C), help spur gains later on.


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Chips Ahoy?

Chip stocks rallied for a second straight week, helped by strong Taiwanese Semi earnings and guidance. That’s a positive sign, because it’s hard to have a broad market rally without chips playing a significant role. The semiconductor sector has a big market cap, especially for the Nasdaq, so that heft alone is important. Plus, chips are in almost everything, from PCs to phones to cars. So if chips are doing well, much of the market is likely thriving.

Still, the SMH ETF remains well below its 50-day line while few individual names are above that key level.

Congress looks set to pass legislation promoting semiconductors in the US in the coming days.


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What To Do Now

Earnings season ramps up this week, with Tesla, Netflix (NFLX) and Johnson & Johnson (JNJ) among the notable reports.

During the past week, investors may have been shaken out of stocks as they fell significantly. In many cases, those names ultimately bounced back. That’s OK. You follow the rules not to be right every time, but to be right most of the time — and to avoid massive losses. If a stock shakes you out and then flashes a new buy signal, such as UnitedHealth, don’t be afraid to buy it back, even at a higher price.

It’s still a time to keep exposure light. The market rally is near key resistance once again, so a reversal would not be out of character. Until there is clear evidence of a sustained uptrend, cash should still be your No. 1 holding.

But, there are some glimmers of hope. Stay engaged and build up your watchlists so you can be ready to take advantage.

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.

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