Dow Jones Futures: Inflation Report, Federal Reserve Are Market Rally Tests; 5 Stocks Setting Up

Dow Jones futures will open on Sunday afternoon, along with S&P 500 futures and Nasdaq futures, with a close eye on the CPI and Federal Reserve inflation reports.


The stock market rally retreated last week with the major indices continuing their trend to surge to new highs but then fading back. It’s a challenging environment to buy stocks.

This coming week investors got a one-two punch of big economic news. On Tuesday, the Labor Department will release the November CPI inflation report. On Wednesday afternoon, the Federal Reserve will raise rates again with Fed chief Jerome Powell offering to signal further tightening in early 2023.

That could be the catalyst for a big market gain or loss, or a bumpy side action could continue. Investors may need to wait for inflation reports and Fed news before adding exposure.

Fractional failures were widespread, with DXCM shares falling back on Friday after briefly clearing a buy point on Thursday on FDA approval.

But here are five stocks to watch: Dow Jones giants Caterpillar (CAT) and Goldman Sachs (GS), Sanmina (SANM), McKesson (MCK) and MercadoLibre (MELI). To be clear, none of these stocks are actionable, with MELI stock in particular needing some work.

Microsoft (MSFT) performed relatively well for megacaps, with Apple (AAPL) below the 50-day line and Tesla (TSLA) is trying to avoid setting new bear market lows. But MSFT stock remains well below its 200-day line and hasn’t made much progress over the past month.

The video embedded in the article reviews the market action in depth and is analyzed Dexcom (DXCM), MercadoLibre and CAT stock.

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Amgen (AMGN) is in final stage discussions to buy Horizon Therapeutics (HZNP) for more than $20 billion, The Wall Street Journal reported Sunday, citing sources. Sanofi (SNY) and Johnson & Johnson (JNJ) has dropped out of the bid. HZNP shares had a market cap of just over $22 billion at Friday’s close, but that has risen sharply since Horizon confirmed takeover talks in late November.

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CPI Inflation And The Fed Meeting

Early Tuesday, the Labor Department will release the November consumer price index. Overall and core CPI inflation rates will cool in the coming months, if only because comparisons are getting harder. But the price of the service is very strong.

The Federal Reserve wants to see a more significant decline in services inflation, as well as wage increases, before halting rate hikes. At 2pm ET, the Fed is expected to raise its Fed funds rate by 50 basis points, to 4.25%-4.5%, ending a streak of four 75 basis point hikes. Investors will want some indication of the February meeting, and how high the fed funds rate may ultimately go. Markets are now pricing in another half-point Fed hike in February, although there is a good chance for a quarter-point move.

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Fed chief Powell’s comments at 2:30 pm ET, along with the CPI inflation report, may set the tone on Fed policy heading into 2023.

Powell and some policymakers have signaled that a recession may be necessary to control inflation.

Dow Jones Futures Today

Dow Jones futures open at 6 p.m. ET on Sunday, along with S&P 500 futures and Nasdaq 100 futures.

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

Join IBD experts as they analyze actionable stocks in the stock market rally on IBD Live

Stock Market Rally

The stock market rally saw a significant pullback for the major indices in recent weeks.

The Dow Jones Industrial Average declined 2.8% in stock market trading last week. The S&P 500 index lost 3.4%. The Nasdaq Composite fell 4%. The small-cap Russell 2000 plunged 5.1%.

The 10-year Treasury yield rose 6 basis points to 3.57%, rebounding from 3.4% midweek.

US crude futures plunged 11% to $71.02 a barrel last week, with gasoline futures down 9.8%. Both hit 2022 lows. Natural gas prices fell 0.6%.


Among the top growth ETFs, the iShares Technology Emerging Software (IGV) Sector ETF fell 4.6%, with Microsoft shares the top holding. VanEck Vectors Semiconductor ETF (SMH) retreated 1.7%.

Reflecting the more speculative story stocks, the ARK Innovation ETF (ARKK) fell 9.2% last week and the ARK Genomics ETF (ARKG) 8.1%. TSLA stock is a large holding across the Ark Invest ETF.

The SPDR S&P Metals & Mining ETF (XME) gave up 6.4% last week. Global X US Infrastructure Development ETF (PAVE) fell again 2.85%. The US Global Jets ETF (JETS) fell 3.3%. The SPDR S&P Homebuilders ETF (XHB) fell 2%. The Energy Select SPDR ETF (XLE) declined 8.45%, firmly breaking its 50-day line. Financial Select SPDR ETF (XLF) retreated 3.9%. The Healthcare Select Sector SPDR Fund ( XLV ) fell 1.3% after rising in eight of the previous nine weeks.

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Megacap shares

Apple shares fell 3.8% in the past week, falling below that key level on Tuesday and hitting resistance there on Friday. Bad news about iPhone production may be pricey, and AAPL shares are rising again.

Shares of Dow technology giant Microsoft also fell 3.8%, but held support at a 21-day line, slightly above a recent 50-day rise. But it is well below the 200-day line. Shares of MSFT were essentially unchanged from a month ago, as were the S&P 500 and Nasdaq.

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Tesla shares fell 8.1% in the latest week, despite a 3.2% gain on Friday. Shares of TSLA surged above recent bear market lows. Tesla announced new Chinese incentives last week with widespread media reports that the Shanghai factory will significantly reduce production in the coming weeks, even halting Model Y production.

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Stocks To Watch

Caterpillar shares fell 3.7% to 227.29 last week, snapping a 21-day streak. The retreat could end in a constructive shake-up. CAT stock has a buy point at 238 or 239.95 from a long cup base. In another week, the heavy equipment giant Dow could have a flat base with that 239.95 buy point. A slightly longer pause will allow the rapidly rising 50-day line to narrow the gap with CAT stock.

Goldman shares fell 5.6% in the last week to 359.14, passing a break from the base of the cup with a buy point of 358.72, before rising slightly above it. A solid bounce from here could offer new entry, especially if the 50-day or 10-week line follows. On the weekly chart, GS stock has a cup base with a 13-month holder, with a buy point of 389.68, according to MarketSmith analysis. The past week has now created more depth on that handle, which could also be a flat base in the week.

Sanmina shares fell 7.3% to 62.48 last week. SANM shares have consolidated tightly in the profit-taking zone after the October breakout from the cup base. Shares may begin a pullback to the 50-day/10-week line, offering a buying opportunity, even if the weekly decline is sharp. SANM shares are also working on as flat a basis as possible.

Shares of McKesson fell 4% to 371.37 last week, falling on Friday to just below the 50-day and 10-week lines. MCK shares are working on a new consolidation after a sharp sell-off on November 10-11 that hit many defensive medical stocks. A move above the December 2 high of 389.45 could offer an early entry, still close to the moving average.

MELI shares fell 5.1% to 896.48, their fourth straight weekly decline. The Latin American e-commerce and payments giant has a buy point of 1,095.44, with a trend line entry around 1,025. An aggressive entry could be a decisive retracement of MELI stock’s moving average, with the Dec. 2 high of 957 as the trigger. While MercadoLibre shares are trending lower, the weekly losses come on lighter volume with some relatively strong positive closes.

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Market Assembly Analysis

A week ago, the stock market rallied to new highs, with the S&P 500 breaking above its 200-day line for the first time in months. But as investors reassessed the jobs report and Fed chief Powell’s comments, major indexes retreated.

The S&P 500 fell below its 200-day line, while the Nasdaq tested its 50-day. Both hit resistance at the 21-day line later this week. The Russell 2000 fell below its 200-day and 21-day lines and dropped to its 50-day, just undercutting its 10-week line.

The rally-leading Dow holds support around its 21-day mark.

The S&P 500 was essentially flat after Nov. 10, when a tame October CPI inflation report supported stocks. The Nasdaq and Russell 2000 are back to early November levels, but also late October peaks.

If you had to design a scenario to get investors to get roughed up repeatedly, this current uptrend might be the blueprint: A market rally with several big gains in a day followed by a pullback in a few sessions.

It is still a confirmed market rally. However, further losses, such as the Nasdaq or especially the S&P 500 clearly breaching their 50-day line, would be worrying.

The November CPI inflation report on Tuesday and the announcement of the Fed meeting on Wednesday and Powell’s comments could provide the catalyst for a sustained market rally, or a decisive sell-off. But they could also spur another seemingly decisive big market pop, only to be followed by another pullback.

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What to do now

Investors should be careful to add exposure until the CPI inflation report and the Fed meeting are in the rearview mirror. Although markets jumped on inflation data and Fed chief Powell’s comments, investors should be selective about new purchases, should major indexes fall again in the next few sessions.

At some point a sustained and stable market rally will occur. When that happens, buying opportunities will abound.

So prepare your stock market holiday shopping list. A large number of stocks from various sectors are establishing or close to doing so.

Read The Big Picture daily to stay abreast of 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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