Dow Jones Futures Fall After Target-Led Sell-Off; Market Rally Has 90% Chance Of Doing This

Dow Jones futures fell solidly early Thursday, along with S&P 500 futures and Nasdaq futures, but paring losses somewhat. The stock market rally sold off hard Wednesday, as a big Target (TGT) earnings miss raised major concerns about retailers, related sectors and the broader economy amid hot inflation and weakening demand.

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Wednesday’s sharp selling comes right on the heels of the major indexes staging a follow-through day to confirm the new stock market rally, flashing bearish signals. Thursday’s futures suggest that the major indexes could undercut or test their rally lows on May 12. Undercutting would end the short-lived rally.

Late Wednesday, Cisco Systems (CSCO) reported mixed results. Cisco earnings edged past fiscal Q3 views, but revenue missed and the networking giant also guided lower for the current Q4, citing supply chain issues from China’s lockdowns. CSCO stock plunged 11% early Thursday. Arista Networks (ANET) and other related stocks also fell solidly.

Fertilizer and lithium play Sociedad Química y Minera de Chile (SQM) reported Q1 EPS skyrocketed 973% vs. a year earlier early Thursday, as sales exploded 282% to $2.02 billion, both crushing views. SQM stock popped 4% before the open, signaling a breakout. Shares edged up 0.4%% to 90.21 Wednesday after hitting 93.14 intraday, briefly topping a 90.97 buy point.

The video embedded in this article discussed Wednesday’s market sell-off and analyzed TGT stock, Northrop Grumman (NOC) and Broadcom (AVGO).

Target Earnings Bad News For Retail

Target earnings tumbled 41%, far more than expected. The retailer blamed shipping costs as well as consumers shifting from TVs and other discretionary items. Target sees margin pressures throughout the current fiscal year. That came a day after Walmart (WMT) missed on EPS and guided low, citing higher costs for goods, shipping and labor. At the time, investors might have thought or hoped that Walmart’s woes were company-specific, but Target’s results signaled a much-broader problem.

Target stock crashed 25% to 161.61. Walmart sank 6.8% after tumbling 11.4% on Tuesday. Both are at the lowest since 2020.

If Walmart and Target are struggling in the current economic climate, that can’t be good for other discounters and retailers and general.

Dollar Tree (DLTR) plunged 14.4% after slipping 3.2% on Tuesday. DLTR stock had been holding up well, but dropped below its 50-day on Tuesday and crashed to its 200-day line. Costco Wholesale (COST) lost more than 12%, after already round-tripping a breakout and dropping below key moving averages in recent weeks. Both Dollar Tree and COST stock report next week.

Best Buy (BBY), which reports early Thursday, sank 10.5% to a two-year low.

Trucking Firms, Tesla, Apple Stock Hit

J.B. Hunt Transport Services (JBHT) sold off 9%, tumbling from near its 10-week line. As consumer demand weakens, trucking companies may see weaker demand, and struggle to pass on skyrocketing diesel fuel prices.

Apple stock tumbled 5.6% to 140.82, a six-month closing low, as the Target warning on consumer discretionary spending added to fears for the Dow Jones tech titan. In the past several weeks, iPhone contract manufacturer Foxconn and Taiwan Semiconductor (TSM), which makes chips for Apple (AAPL) and many others, warned of weak smartphone demand. AAPL stock is on track for an eighth straight weekly loss.

Tesla stock tumbled 6.8% to 709.81, the lowest close since August. While weaker consumer discretionary in theory could hurt demand for Tesla’s high-priced electric vehicles, overall auto production is so low that supply is still the overriding factor. Tesla (TSLA) is being pressured along with other highly valued growth names, along with Shanghai plant output issues and CEO Elon Musk’s ongoing Twitter (TWTR) takeover saga. Twitter stock fell 3.8% to 36.85, a two-month low and even further below Musk’s $54.20 takeover price.

Also, the S&P 500 ESG index booted Tesla, largely on corporate culture issues, triggering more angry tweets from Musk.

Meanwhile, the U.S. National Highway Traffic Safety Administration is probing a Tesla Model S crash earlier this month that killed, possibly involving Autopilot. The NHTSA is probing dozens of Autopilot-related accidents.

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Dow Jones Futures Today

Dow Jones futures fell 0.85% vs. fair value. S&P 500 futures dropped 0.85%. Nasdaq 100 futures declined 0.9%. Those are well off their worst levels of the morning. Cisco stock is a Dow Jones, S&P 500 and Nasdaq component. Several other networking and hardware stocks also lost ground.

The 10-year Treasury yield fell 5 basis points to 2.84%.

U.S. crude oil prices retreated nearly 2%. Gasoline futures are down 3%.

Overnight action in Dow futures and elsewhere doesn’t necessarily translate into actual trading in the next regular stock market session. But, if futures do hold up to the open, the Dow Jones would break below its May 12 rally lows while the S&P 500 would come close. The Nasdaq composite isn’t far from its May 12 lows as well.

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

Stock Market Rally

The stock market rally opened sharply lower and kept falling on Wednesday.

The Dow Jones Industrial Average tumbled 3.6% in Wednesday’s stock market trading. The S&P 500 index skidded 4%. The Nasdaq composite plunged 4.7%. The small-cap Russell 2000 gave up 3.5%.

U.S. crude oil prices reversed from modest gains to decline 2.5% to $109.59 a barrel. Gasoline futures fell more than 5%.

The 10-year Treasury yield fell 8 basis points to 2.89%.

Among the best ETFs, the Innovator IBD 50 ETF (FFTY) skidded 3.8%, while the Innovator IBD Breakout Opportunities ETF (BOUT) lost 3.9%. The iShares Expanded Tech-Software Sector ETF (IGV) gave up 4%. The VanEck Vectors Semiconductor ETF (SMH) tumbled 4.8%.

SPDR S&P Metals & Mining ETF (XME) slumped 4.15% and the Global X U.S. Infrastructure Development ETF (PAVE) retreated 3.6%. U.S. Global Jets ETF (JETS) descended 3.4%. SPDR S&P Homebuilders ETF (XHB) tumbled 5.5%. The Energy Select SPDR ETF (XLE) and the Financial Select SPDR ETF (XLF) lost 2.75%. The Health Care Select Sector SPDR Fund (XLV) fell 2.6%

The SPDR S&P Retail ETF, which includes Target stock and Walmart as major components, plunged 8.3% to the lowest since December 2020.

Reflecting more-speculative story stocks, ARK Innovation ETF (ARKK) slumped 4.4% and ARK Genomics ETF (ARKG) 4.7%. TSLA stock remains the No. 1 holding across Ark Invest’s ETFs.

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Market Rally Analysis

When you get a brand-new car, you don’t expect problems as you drive off the lot. But if you do, you might have a lemon. On Tuesday, the major indexes staged a follow-through day, confirming the new stock market rally.

But on Wednesday, the major indexes tumbled, giving up all of Tuesday’s strong gains and much more.

A weaker consumer and soaring costs for businesses is a grim combination for retailers and discretionary goods makers. With consumer spending more than two-thirds of the U.S. economy, the risks of an economic hard landing grow as the Fed tries to bring down inflation. Aggressive Fed rate hikes will cause serious pain. But the alternative, letting inflation stay high, is clearly affecting demand as well.

Setting aside the reasons for the sell-off, the technical action is clear. Not every follow-through day works, and Wednesday’s action was a bearish signal.

The major indexes closed below their FTD lows. Eric Krull, co-author of “The Lifecycle Trade,” says his research shows that when the major indexes do this, there’s a 90% chance that the market rally will ultimately fail.

The odds might be even worse in this case. The Dow Jones and S&P 500 forged new 52-week closing lows on Wednesday, with the Nasdaq not far doing so.

However, the market rally is still in force until the major indexes undercut the start of their rally, in this case the May 12 intraday lows. The Dow Jones in particular is close to breaking lower. Another leg down for the S&P 500 would almost certainly push the benchmark index into a bear market, joining the Nasdaq.

Look on a weekly chart of the major indexes, and it’s hard to see the rally. The Dow, S&P 500 and Nasdaq are all on track to extend long weekly losing streaks.

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What To Do Now

Wednesday’s sell-off is why it’s a good idea to step into a newly confirmed stock market rally slowly. That was especially true of the current market rally, with the major indexes below key moving averages and few stocks in position.

Investors who bought stocks or ETFs on Wednesday’s FTD should be scaling out or exit.

Keep working on your watchlists. Focus on stocks with strong relative strength. But a strong RS line isn’t a green light to buy a stock, especially in a weak market.

The sell-off in DLTR stock on Wednesday — and Apple over the few weeks — show how stocks can hold up well, until they don’t. So wait until a stock flashes a buy signal in a strong market, and be ready to get out.

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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