Dow Jones Futures: Stock Market Sells Off As Hawkish Fed Sees New Terminal Rate

Dow Jones futures fell modestly overnight, along with S&P 500 futures and Nasdaq futures. The stock market whipsawed sharply lower Wednesday after the Federal Reserve hiked aggressively once again and signaled a higher peak, or “terminal” rate.




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This is a stock market correction. Investors should remain cautious, but looking for leading names.

Celsius Holdings (CELH), Shockwave Medical (SWAV), TO YOU (TO YOU), GlobalFoundries (GFS) and Enphase Energy (ENPH) are all showing strong relative strength in a weak market.

CELH stock and Shockwave Medical are on the IBD Leaderboard watchlist. Celsius Holdings, Enphase and SWAV stock are on the IBD 50. ENPH stock is on the IBD Big Cap 20. Celsius was Wednesday’s IBD Stock Of The Day, while Shockwave was Monday’s.

The video embedded in this article discussed Wednesday’s roller-coaster market action and analyzed Celsius, ATI and GFS stock.

Fed meeting

As expected, the Fed raised its key interest rate by 75 basis points for a third straight meeting, lifting the target range to 3%-3.25%.

Fed policymakers now see the fed funds rate at 4.4% at the end of 2022, up from 3.4% after the June meeting. That’s what markets are pricing in: Another 75 basis points at the November meeting, followed by 50 basis points in December, for a year-end range of 4.25%-4.5%.

The central bank also signaled some modest tightening in 2023, predicting a 4.6% fed funds rate at the end of next year vs. to 3.8% forecast in June. That’s also not out of line with what market watchers have expected for the terminal rate. Policymakers expect the rate to retreat to 3.9% in 2024.

Fed chief Jerome Powell once again stressed that the central bank won’t let up vs. inflation. He noted that a “soft landing” will be difficult, but he wouldn’t say what the odds of a recession are. “At some point,” the Fed will slow the pace of rate hikes, Powell said, but didn’t indicate when that might happen. I have added that Fed policy will need to stay “restrictive” for some time.

Fed chief Powell said that the labor market continues to be “out of balance,” though he added that commodity prices look like they’ve peaked.

Dow Jones Futures Today

Dow Jones futures fell 0.3% vs. fairvalue. S&P 500 futures slipped 0.6%. Nasdaq 100 futures fell 0.7%.

The 10-year Treasury yield rose 4 basis points to 3.55%.

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 Wednesday

The stock market rose modestly into the Fed meeting decision, then went on a roller-coaster ride that ended at session lows.

The Dow Jones Industrial Average fell 1.7% in Wednesday’s stock market trading. The S&P 500 index also retreated 1.7%. The Nasdaq Composite tumbled 1.8%. The small-cap Russell 2000 fell 1.5%

US crude oil prices fell 1.2% to $82.94 a barrel.

The 10-year Treasury yield fell 6 basis points to 3.51% after briefly hitting 3.62% following the Fed rate hike. The two-year Treasury yield rose above 4%, closing around 4.04% but well off session highs.

ETFs

Among the best ETFs, the Innovator IBD 50 ETF (FFTY) fell 1.8%. The iShares Expanded Tech-Software Sector ETF (IGV) gave up 1.4%. The VanEck Vectors Semiconductor ETF (SMH) lost 0.8%.

SPDR S&P Metals & Mining ETF (XME) slipped 2.1% while US Global Jets ETF (JETS) descended 4% on a bad day for travel plays. SPDR S&P Homebuilders ETF (XHB) shed 1.1%. The Energy Select SPDR ETF (XLE) retreated 1.5% and the Financial Select SPDR ETF (XLF) 2.1%. The Health Care Select Sector SPDR Fund (XLV) declined 1.7%.

Reflecting more-speculative story stocks, ARK Innovation ETF (ARKK) shed 2.65% and ARK Genomics ETF (ARKG) 2.7%.


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CELH Stock

Celsius stock fell 3.9% to 98.23 on Wednesday. Shares have pulled back to find support at its 10-week moving average after a 209% run from early May to late August. In another couple of weeks, CELH stock could have a new base, with a 118.29 buy point. Investors could use 108.47 as an early entry for the energy drinks maker.

The relative strength line for CELH stock is right at record highs.

Shockwave Stock

SWAV stock sank 1.85% to 284.69 on Wednesday, reversing lower from 300.96 intraday. Shockwave stock continues to find support around its 21-day line.

ATI Stock

ATI stock lost just over 2% to 29.67, trading around its 21-day line after pulling back from a seven-year high of 33.31. Shares of the specialty alloys maker have retreated to the top of a prior base and just above its 10-week line. A 10-week line bounce could provide an early entry, with a proper base another week away.

While ATI stock has pulled back, its RS line is right at highs.

GFS Stock

GlobalFoundries stock dipped 0.9% to 56.29. That’s just above its 50-day and brand-new 200-day line, while GFS stock is slightly below its 10-week line. The 2021 chip foundry IPO has a very deep double-bottom base with a handle, offering a 66.06 buy point. At the end of this week, GFS stock’s handle will be long enough to be its own base, with the same 66.06 entry.

ENPH Stock

Enphase stock edged down 15 cents to 304.56, continuing to find support from its 21-day moving average. ENPH stock is still extended from its 50-day line, but becoming less so. The RS line for Enphase stock has been hitting new highs for weeks.

Stock Market Analysis

As usual, the stock market whipsawed following the Fed rate hike decision, new rate projections and Powell’s comments, briefly rallying strongly before ultimately closing with sharp losses. The major indexes ultimately had ugly, outside downside reversal sessions.

While markets weren’t blindsided Wednesday, the overall Fed tone likely was a little more hawkish than expected. But, ultimately, the Federal Reserve is hiking rates aggressively despite growing recession risks, in order to put inflation back into its box.

Markets will often have a day two Fed reaction. But even if stocks rebound Thursday, that wouldn’t be meaningful.

The major indexes all undercut recent lows intraday Wednesday and are losing sight of their 50-day moving averages. The June lows are not that far away.


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What To Do Now

Ultimately, it’s not the news but the market reaction to the news that matters. And the stock market did not react well to Wednesday’s Fed meeting decision.

Could the market get a short-term bounce, or even a decent rally over several weeks? Sure. But investors will want to see a lot more evidence.

Leading stocks such as Celsius, Shockwave and Enphase may flash buy signals early in a market rally attempt. But investors have to balance the urge to get into hot stocks quickly against making sure a broad uptrend is underway. If the market heads toward June lows or beyond, even relative leaders will likely break down.

If a real stock market rally takes hold, there will be plenty of opportunities. The key is to be ready.

Work on those watchlists. Focus on stocks with strong relative strength and those names that are holding or reclaiming key moving averages.

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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