Dow Jones futures will open Sunday evening, along with S&P 500 futures and Nasdaq futures, with a tentative debt-ceiling deal between President Joe Biden and House Republicans in focus. The Saturday night agreement would head off a looming sovereign default. How will the stock market rally react to the debt-limit resolution?
The market rally last week was divergent but ended on a hopeful note. The indexes were solidly lower as of Wednesday. Techs then boomed as Nvidia (NVDA) skyrocketed, sending chips and artificial intelligence plays soaring. Meanwhile, signs of progress on a debt-ceiling deal also buoyed markets Friday. Still, the overall weekly action was mixed, with breadth at times stunningly anemic and a number of leading stocks struggling.
After weeks of negotiations, Biden and House Speaker Kevin McCarthy sealed the debt-limit deal in principle Saturday night. The agreement includes a two-year debt-limit increase and will keep non-defense, non-veterans discretionary spending about flat with current levels over two years. It would also impose some new restrictions on certain government aid.
“We still have a lot of work to do, but I believe this is an agreement in principle that is worthy of the American people,” McCarthy told reporters Saturday night.
The House speaker plans a House vote on Wednesday, with the Senate following soon after. Treasury Secretary Janet Yellen said Friday evening that the U.S. could run out of funds by as early as June 5.
McCarthy said Sunday that he expects the legislation to pass with most GOP lawmakers voting yes. The debt-ceiling deal will likely face significant “no” votes on the left and right.
Stocks To Watch
Tesla (TSLA), Netflix (NFLX), Arista Networks (ANET), On Semiconductor (ON), NetEase (NTES), Mobileye (MBLY), Smartsheet (SMAR), Aehr Test Systems (AEHR) and McKesson (MCK) are trading near buy points.
ANET stock, Netflix, On Semiconductor, NetEase and Mobileye all flashed buy signals Friday. Tesla, Aehr Test Systems, Smartsheet and MCK stock are all close to being actionable.
The video embedded in this article discusses the weekly market action and analyzes Arista Networks, Smartsheet and Tesla stock.
Dow Jones Futures Today
Dow Jones futures open at 6 p.m. ET, along with S&P 500 futures and Nasdaq 100 futures.
How will futures react to the debt-limit deal? A default would have been devastating, but markets had already rallied to some extent on optimism that a compromise would be reached in time. Also, the debt-limit agreement is one of several fiscal drags looming for the struggling economy still absorbing 500 basis points of Fed rate hikes, with more likely to come.
Watch Treasury yields and the U.S. dollar. Yields have risen in recent days in part on fears of a massive Treasury issuance after a debt-ceiling deal. Meanwhile, default fears had, counterintuitively, spurred big safe-haven flows into the dollar. Stronger U.S. economic data and rising Fed rate hike expectations, along with weaker overseas data, has also buoyed the dollar.
U.S. stock markets will be closed Monday in observance of the Memorial Day holiday. But other exchanges around the world will be open. Dow futures also will trade normally on Monday.
Stock Market Rally
The stock market rally was struggling midweek amid debt-ceiling concerns, but bounced back as Nvidia triggered an AI revolution and default fears eased. Even so, the indexes closed mixed.
The Dow Jones Industrial Average fell 1% in last week’s stock market trading. The S&P 500 index edged up 0.3%. The Nasdaq composite jumped 2.5%. The small-cap Russell 2000 closed flat.
The 10-year Treasury yield climbed 13 basis points for the week to 3.82%, the highest point since early March. The odds of a Fed rate hike next month have jumped to 70%.
U.S. crude oil futures rose 1.4% to $72.67 a barrel last week. Copper prices fell 1.3%, but rebounded from 2023 lows, jumping 2.6% on Friday.
Among growth ETFs, the iShares Expanded Tech-Software Sector ETF (IGV) rose 3.4%, with SMAR stock a small holding. The VanEck Vectors Semiconductor ETF (SMH) exploded for a 10.55% gain with Nvidia a major holding and ON stock also in the ETF.
SPDR S&P Metals & Mining ETF (XME) fell 2.9%% last week to a nine-month low. The Global X U.S. Infrastructure Development ETF (PAVE) dipped 0.8%. U.S. Global Jets ETF (JETS) slipped 1.25%. SPDR S&P Homebuilders ETF (XHB) slumped 2% after hitting a 52-week high in the prior week. The Energy Select SPDR ETF (XLE) fell 1.1%. The Health Care Select Sector SPDR Fund (XLV) tumbled 2.9%. MCK stock is part of XLV.
Tesla stock jumped 7.2% to 193.17 during the week, including Friday’s 4.7% pop in heavy volume. The EV giant decisively cleared its 50-day line and now is approaching a 207.89 buy point, according to MarketSmith analysis. That buy point is for an eight-week cup base or a three-month double-bottom consolidation. Either way, TSLA stock has consolidated just below the 200-day line the entire time. However, the 200-day line is now right at the 200 level, below the buy point. So a breakout would be valid, with a decisive drop below the 200-day line as a place to exit.
Other Stocks Near Buy Points
NFLX jumped 5.5% to 378.88 on Friday clearing an alternate handle buy point of 375.97 from a double-bottom base and hitting a 52-week high.
ANET stock skyrocketed more than 18% to 170.35 for the week amid the AI frenzy. Shares jumped above the 50-day line and touched a trendline on Thursday, then leapt 9.1% on Friday to a record close, with huge volume on both sessions. Arista stock is now slightly extended from 50-day/trendline early entry, but is also close to the 171.54 official buy point. Ideally, shares would pause and forge a handle. ANET stock has recovered since plunging May 2 after management didn’t raise guidance enough to satisfy investors.
ON stock rebounded from its 50-day line on Thursday, then ran up 5.6% on Friday to 86.62. Shares broke the downtrend of a steep handle, offering an early entry. The official buy point is 87.17, which Onsemi briefly topped intraday Friday. Note that On Semiconductor stock has a history of breaking out but later tumbling back into the old base. On Semiconductor is a Tesla chip supplier.
AEHR stock edged down 0.6% to 32.76 for the week, but found support at the 50-day line and rose solidly late in the week. It’s forged a handle that’s slightly too low to be proper, but investors could use 33.40 as an early entry. That’s probably safer than waiting for a traditional breakout above 40.79. On Semiconductor is Aehr Test Systems’ top customer.
MBLY stock erupted for a 10.6% weekly gain to 45.14, vaulting back above the 50-day line. That offered an aggressive entry on Thursday and Friday morning, but Mobileye stock is now extended from that. It is close to a trendline entry near 46, with 47.04 yet another key level. The official buy point is 48.21. Ideally, MBLY stock would pause and forge a handle. Like ANET stock, Mobileye plunged following earnings several weeks ago.
SMAR stock is pausing just below a 49.09 buy point from a cup base, right next to another short consolidation. Smartsheet stock did rise 2.2% to 47.86 for the week, with all of the gains and more coming Friday. The work-planning software maker has rallied following strong results earlier this month from Monday.com (MNDY). Smartsheet earnings are due June 7.
MCK stock fell 2.4% to 387.95 last week, near the top of a six-month consolidation. The drug distributor has forged a handle with a 401.53 buy point. McKesson stock is a defensive growth play. So if a risk-on, growth rally takes firm hold, McKesson could lag.
NTES stock rose 2.4% for the week to 89.51. On Thursday, shares rebounded from their 200-day line following earnings. On Friday, NetEase stock reclaimed the 50-day line, offering an early entry. The Chinese mobile gaming giant has a 95.09 flat-base buy point.
Market Rally Analysis
After Thursday’s stunningly divergent session, tech led again on Friday, but the advance was more broad-based. Debt-ceiling deal optimism, after some midweek jitters, helped buoy investor sentiment.
Still, this is a split stock market rally. The Nasdaq is surging toward its August highs, with the Nasdaq 100 already there. The Nasdaq 100 is 8.8% above its 50-day line, while the Nasdaq composite is 6.8% above that level.
The S&P 500, after tumbling back into its sideways range midweek, is right at 2023 highs again.
But the Dow Jones fell below its 50-day and 200-day lines this past week, though it did reclaim its 200-day on Friday. The Russell 2000 tumbled back from its 200-day line, though it did erase losses and close above its 50-day.
The First Trust Nasdaq 100 Equal Weighted Index ETF (QQEW) popped 1.6% for the week. On Friday, QQEW leapt 2.5%, hitting a 2023 high and nearly topping its August peak. That was a sign of broader participation, at least among growth stocks.
The Invesco S&P 500 Equal Weight ETF (RSP) fell 1.2% for the week, tumbling back below all its moving averages again even with a solid Friday gain.
Within the AI and chip spaces, a large number of stocks had huge weekly gains, many racing past buy points.
But elsewhere market leadership is narrow. A number of stocks and groups suffered significant losses midweek. Some have bounced back, but others may need to set up again.
The debt-ceiling deal, assuming it clears Congress, avoids a catastrophic default. But the market rally was holding up or rallying into the early June default deadline. So an actual agreement to lift the debt limit may not spur big additional gains. Dow futures will also move on Treasury and currency markets’ reaction to the debt-limit news.
Fed-rate hike concerns could now take center stage again. On the plus side, that’s coincided with relatively solid economic data, easing recession fears.
What To Do Now
The past week offered some buying opportunities, though investors needed to get on them quickly. Also, the mixed market signals may have instilled some understandable caution.
This was a week where “fortune favors the bold,” but over the past few months, “discretion is the better part of valor” has been a prudent course.
Ideally, a market rally will offer clear signals to be more or less aggressive. That hasn’t been the case since early February.
Meanwhile, many AI and chip names raced through buy zones and haven’t looked back, but a number of other stocks have staged shakeouts or clear sell signals.
Assuming the market rally makes further progress and more stocks flash buy signals, you can add to your exposure. But do so gradually. If this uptrend takes hold, it won’t take long to become fully exposed. If this split market takes a Mr. Hyde turn, your losses will be minimized.
Run your screens this weekend. The big swings over the past week may mean significant changes to your watchlists. Come back Tuesday alert, flexible and ready to act.
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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