Dow Jones futures fell slightly Sunday night, along with S&P 500 futures and Nasdaq futures. Tesla earnings headline the week ahead, with the EV giant touting an Austin-made Cybertruck.
The stock market rally had a powerful week, with the S&P 500 and Nasdaq composite running to fresh 52-week highs. A lot of stocks offered buying opportunities.
But investors may want to exercise caution in the very near term. The Nasdaq is somewhat extended, raising the risks of a pullback. Many stocks that flashed buy signals late in the week fell back Friday with the Nasdaq reversing slightly lower Meanwhile, many other leading stocks are extended as well.
Finally, earnings season is a wild card for individual stocks and the broader market.
Nasdaq 100 Rebalance
The Nasdaq is expected to spell out how a Nasdaq 100 special rebalance will adjust weights of its 100 components. The details were expected Friday night but have not arrived yet.
The Magnificent Seven of Microsoft (MSFT), Apple (AAPL), Nvidia (NVDA), Tesla (TSLA), Google parent Alphabet (GOOGL), Meta Platforms (META) and Amazon.com (AMZN) are set to see their outsized-dominance lessened in the special rebalance that takes effect before the open on July 24.
But that upcoming rebalance, first announced on July 7, didn’t stop megacaps from having a big week, especially Meta stock, Nvidia and Google.
Friday night, a federal appeals court rejected an FTC bid to prevent Microsoft from closing its takeover of Activision Blizzard (ATVI). Nasdaq has already said Trade Desk (TTD) will replace ATVI stock in the Nasdaq 100 before Monday’s open.
Meanwhile, Tesla earnings are due Wednesday night for the second quarter, following strong preliminary results from China EV giant BYD (BYDDF). The EV maker on Saturday showed off its first Cybertruck made at its Austin plant.
Dow Jones Futures Today
Dow Jones futures fell 0.2% vs. fair value. S&P 500 futures dipped 0.2%. Nasdaq 100 futures slipped 0.2%.
Crude oil futures declined slightly.
Stock Market Rally
The stock market rally had a stellar week, as tame inflation reports eased Fed rate hike fears and sent Treasury yields and the dollar tumbling.
The Dow Jones Industrial Average rose 2.3% in last week’s stock market trading, hitting a 2023 high and just below a 52-week best. The S&P 500 index popped 2.4% and the Nasdaq composite leapt 3.3%, both setting fresh 52-week highs. It was the Nasdaq’s best weekly gain since the end of March.
The small-cap Russell 2000 jumped 3.7%.
The Invesco S&P 500 Equal Weight ETF (RSP) climbed 2.4%, in line with the S&P 500.
The First Trust Nasdaq 100 Equal Weighted Index ETF (QQEW) raced 3.9% higher, slightly outpacing the Nasdaq 100’s 3.5% gain.
The small-cap Russell and the equal-weight indexes point to the big improvement in market breadth. While losers easily beat winners on Friday, advance-decline lines have risen significantly in the past couple of weeks while new highs have trounced new lows.
Leaders had a great week, with software and chip stocks prominent among new buying opportunities.
However, the Nasdaq is 7.4% above its 50-day line, while the Nasdaq 100 is 8% above that key level. That raises the risk of another market pullback. The Nasdaq could get even more extended, but that would greatly increase the odds of market retreat, with a greater likelihood that it would larger.
Friday’s retreat from highs could reflect the market’s need for a pause. Many leading stocks erased gains or reversed lower, but weekly charts generally look strong.
The 10-year Treasury yield plunged 23 basis points to 3.82%, even with Friday’s gain of 6 basis points.
U.S. crude oil futures rose 2.1% to $75.42 a barrel last week, but did fall 1.9% on Friday.
Copper futures jumped 4.1% for the week.
Among growth ETFs, the Innovator IBD 50 ETF (FFTY) popped 3.4% last week. The iShares Expanded Tech-Software Sector ETF (IGV) soared 5.6%, with MSFT stock a huge component. The VanEck Vectors Semiconductor ETF (SMH) leapt 5.3%. Nvidia stock is the top holding in SMH.
Reflecting more-speculative stocks, ARK Innovation ETF (ARKK) spiked 11.1% last week and ARK Genomics ETF (ARKG) 9.4%. Tesla stock is the No. 1 holding across Ark Invest’s ETFs. Cathie Wood’s Ark also owns some Nvidia and BYD stock.
SPDR S&P Metals & Mining ETF (XME) rose 2% last week. The Global X U.S. Infrastructure Development ETF (PAVE) gained 2.6%. U.S. Global Jets ETF (JETS) reversed lower for a 1.4% decline. SPDR S&P Homebuilders ETF (XHB) shot up 7.1%. The Energy Select SPDR ETF (XLE) edged up 0.8% and the Health Care Select Sector SPDR Fund (XLV) climbed 2.1%. The Industrial Select Sector SPDR Fund (XLI) advanced 2.3%.
Analysts expect Tesla earnings to show a modest gain vs. a year earlier. In Q2 2022, the Shanghai plant was shut down for several weeks to Covid, while the Berlin and Austin plants were slowly ramping up. Earnings per share could be roughly flat with Q1’s 85 cents.
Tesla already reported Q2 deliveries of 466,140 EVs, easily beating views thanks to ongoing price cuts and incentives. Gross margins for Q2 will key after tumbling in Q1 and in recent quarters.
Tesla Discounts Continue
Tesla continues to increase discounts in the third quarter, suggesting more pressure on gross margins. In Germany, there’s now nearly a 10% discount on the Model 3 LR RWD off the list price. Tesla has tried to limit official price cuts in recent months, avoiding negative headlines.
Early Saturday, the EV giant tweeted a photo of the first Tesla Cybertruck made at the Austin factory. That kicks off production of the love it-or-hate it EV.
During the Tesla earnings call, investors will want some timeline on when mass production will start for the long-delayed Cybertruck. Potential buyers still don’t know what prices or specs the Tesla Cybertruck will have. Tesla originally said the Cybertruck would start at $39,900, with a $69,900 tri-motor version with a range above 500 miles. But it took those down years ago, while CEO Elon Musk has noted that the stainless-steel design is expensive.
Investors also will be interested in news about an upcoming updated Model 3. Investors also will look for news on a future Mexico plant, which will make Tesla’s next-generation model. Musk has hinted at the next-gen model, but no more than that.
Investors are upbeat heading into Tesla earnings. Tesla stock rose 2.5% last week to 281.38, hitting a fresh 2023 high intraday Friday. TSLA stock is up 128% in 2023. Shares are working on a 313.80 buy point from a deep consolidation going back to late September.
Meanwhile, Tesla archrival BYD reported preliminary first-half results, signaling Q2 profit could nearly triple. BYD stock rose 3.7% to 34.53 last week, rebounding from the 21-day and 10-week lines, offering a new entry.
What To Do Now
Traders should have been adding exposure in the latest week and be significantly invested at this point.
Despite all the good news and positive long-term trends, this is not a great time to be making new buys. Also, the market is getting extended again. A modest pullback may not mean much for holdings with a decent cushion, but could quickly put newer buys underwater.
Friday’s market action, with the major indexes erasing modest morning gains, pushed a number of stocks below recent entries. Many of these names still look solid on weekly charts.
As a practical matter, a lot of stocks are now extended from buy points, such as Nvidia.
Also note that earnings season is ramping up, with the potential for big swings up and down for individual stocks and sectors as well as the broader market.
But investors should keep their watchlists up to date. This is how you spot quality setups so you’re ready to pounce when entries present themselves.
Analyze your portfolio. Which holdings might you take profits in and which do you want to try to add a few more shares?
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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