May 27, 2024

Cocoabar21 Clinton

Truly Business

Dow Jones Futures: Soaring Margin Debt Raises Concern For Market Rally; The Bear Case For Tesla Stock

9 min read

Dow Jones futures will reopen Sunday evening, along with S&P 500 futures and Nasdaq futures, after the stock market rally showed resilience last week. The Bitcoin price traded at fresh record highs Saturday.


Solar IPO Shoals Technologies (SHLS), 5G chipmakers Qorvo and MaxLinear (MXL), Dow Jones giant Microsoft (MSFT) are all near buy points, with SHLS stock and Microsoft already actionable and Apple supplier Qorvo (QRVO) arguably so. We’ll also take a look at Tesla (TSLA), which continues to test key levels.

The Dow Jones actually edged higher last week while the S&P 500 and S&P 500 fell modestly, rallying off short-term support. Growth stocks, especially more speculative names, suffered significant to sharp losses, though they generally rebounded on Friday. Metals, miners and financial stocks were strong performers.

Still, the recent action highlights the need for proper entries and sound sell rules. The problem with such a strong stock market rally is that it’s a bad teacher. Just like an easy A, everyone enjoys easy money. But if you learn the wrong lessons from the past 10 months, then that easy money will go away quickly.

While the Nasdaq is no longer extended, margin debt and investor exposure overall is a growing concern.

Why This IBD Tool Simplifies The Search For Top Stocks

Tesla stock and Microsoft are on IBD Leaderboard. MSFT stock is on IBD Long-Term Leaders. SHLS stock is IBD Stock Of The Day. MXL stock is the focus of a recent IBD Stock Analysis column.

Dow Jones Futures Today

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

Remember that overnight action in Dow futures and elsewhere doesn’t 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.

Coronavirus News

Coronavirus cases worldwide reached 111.64 million. Covid-19 deaths topped 2.47 million.

Coronavirus cases in the U.S. have hit 28.70 million, with deaths above 509,000. New coronavirus cases in the U.S. have dropped below 100,000 for eight straight days, while hospitalizations and deaths also tumbling. Vaccinations and, soon, warmer weather should start to have a real impact on slowing transmission.

Stock Market Rally Last Week

The stock market rally had a mixed week, with a mini-rotation from growth stocks into cyclicals and financials.

The Dow Jones Industrial Average edged up 0.1% in last week’s stock market trading. The S&P 500 index dipped 0.7%. The Nasdaq composite retreated 1.6%, but bounced somewhat from its 21-day exponential moving average.

Growth stocks were roughed up in the middle of the week, but Friday gains helped limit losses overall.

Among the best ETFs, the Innovator IBD 50 ETF (FFTY) dipped 0.6% last week, thanks to a 2.15% pop on Friday. The Innovator IBD Breakout Opportunities ETF (BOUT) edged down 0.2% last week. The iShares Expanded Tech-Software Sector ETF (IGV) fell 1.4%. Microsoft stock is the top IGV holding. The VanEck Vectors Semiconductor ETF (SMH) lost 0.3%, with QRVO stock a component.

Losses were heavier in more-speculative names. ARK Innovation ETF (ARKK), which owns Tesla stock and many others, slid 2.5%, even with a 2.3% bounce Friday. ARK Genomics Revolution ETF (ARKG) retreated 4.1% last week, with several key holdings taking big hits.

Bitcoin Price Soars

While speculative stocks struggled a bit, Bitcoin remained hot last week, skyrocketing past $50,000, $52,000 and finally $56,000 on Friday. On Saturday, Bitcoin topped $57,500, before pulling back to above $56,000.

With growing mainstream acceptance of the cryptocurrency, Bitcoin has a lot of momentum. Tesla CEO Elon Musk tweeted early Saturday morning that Bitcoin and Ethereum “do seem high lol,” but that follows several positive statements for the cryptocurrency and Tesla buying $1.5 billion worth a a few weeks ago.

While Bitcoin doesn’t have fundamentals per se, investors can still trade it on a technical basis. Bitcoin and Bitcoin-related stocks have been going vertical. A Bitcoin pullback would not be a surprise, even if it’s only temporary.

SHLS Stock

Shoals stock jumped 5.9% last week to 40.17, with nearly all of the gain coming Friday. SHLS stock is now actionable, above an early entry just before 40. The official buy point is 41.86, according to MarketSmith analysis.

The IPO base has a lot of positive qualities. After a brief run-up from the late January IPO debut, SHLS stock corrected just 16%. On Friday, the relative strength line hit a new high with the stock still in the base. That’s especially bullish, giving Shoals stock a blue dot at the end of its RS line on a MarketSmith chart.

Shoals Technologies makes a variety of gear for solar energy systems and components to carry electricity from solar panels to inverters. It’s already profitable, with decent sales growth.

MaxLinear Stock

MaxLinear stock rose 3.3% to 38.33 last week, including a 5.8% jump Friday. That’s just below a 38.81 buy point from a seven-week consolidation. Over the past couple of weeks, up days have come on higher volume than down sessions.

The RS line for MXL stock is near a record high.

The chipmaker delivered huge growth in the latest quarter: Earnings surged 144% on 178% sales growth. 5G businesses are part of the MaxLinear story, but only a portion.

Qorvo Stock

Qorvo stock jumped 4.8% on Friday to 179.39, turning a weekly loss into a 1.9% gain. Friday’s rebound from the 50-day/10-week line also pushed QRVO stock over its 21-day line and up to the edge of a downward-sloping trend line. Investors could buy the Apple iPhone chip supplier here or wait for a little more strength to clear the downtrend.

Qorvo stock is working on a base with a likely 191.93 official buy point. It needs another week for a flat base, though at 15.01% deep it’s a hair too deep to officially qualify. Investors might want to at least start a position off the 10-week line or trend line. QRVO stock has had solid gains over the past few months but has had a tendency to run up and then pull back to the top of the prior consolidation before rebounding again.

While Qorvo stock had a strong week, key customer Apple did not. Apple stock fell 4.1%, finishing 1.9% below its 10-week line.

Microsoft Stock

Microsoft stock fell 1.6% to 240.97. That was just a little too much of a drop to form a three-weeks-tight, though investors could use 246.23 as an add-on entry. MSFT stock is still in range from a 232.96 buy point.

The Dow Jones tech giant has been booming thanks to cloud computing. Microsoft earnings growth has accelerated for the past two quarters. The 17% revenue gain in the last quarter was the best in years.

Tesla Stock

Tesla stock fell 4.3% last week to 781.30. Shares rebounded from the 50-day line on Wednesday — as Ark Funds’ Cathie Wood expressed growing “confidence” in Tesla stock, saying she was buying more shares. But TSLA stock finished the week slightly below the 10-week line.

Earlier this month, this column reviewed the Tesla stock bull case from a technical standpoint. Those conditions all still remain and in some ways have improved. A TSLA stock rebound from the 50-day/10-week line would offer a buying opportunity, but investors might want to wait to see if TSLA stock can reclaim its now-falling 21-day. As Tesla continues to move sideways, a possible downward-sloping trend line becomes less steep. Also, if Tesla does start to bounce back, it’ll soon have a new base.

But what’s the bear case for Tesla stock from a technical standpoint? Well it has been lagging the market in the past few weeks, which is not a big deal so far. Speculative names are facing some pressure, and TSLA has had a mammoth run. Analyst price targets on Tesla stock make heroic assumptions about the company’s sales, self-driving prospects and much more for the next decade.

TSLA stock is hitting resistance at the 21-day line, at least for now.

Keep in mind that the 50-day/10-week line test is a test. A successful test would offer a new buying chance, but a failure could trigger a sell signal.

If TSLA stock falls decisively through 50-day/10-week line, what’s the next support area? Perhaps 695, the price at which Tesla entered the S&P 500 index. Beyond that you’re looking at top of the prior base at about 500. The 200-day line is now about 450, not far from the November breakout buy point of 466.

All of that would be in character for TSLA stock, especially if the market fell into a correction. In the huge run from late 2019, Tesla stock has had some deep bases.

So if investors do buy Tesla stock at or near these levels, price that off the 10-week line and be ready to sell. A decisive break may be a signal for longer-term investors to take some more profits.

Tesla arguably is the most important stock in the market rally. It’s the ultimate story stock, with a huge market cap. Call options helped fuel its 2020 run. Ark Funds is a major Tesla stock investor and champion. The EV maker has even bought $1.5 billion worth of the power-hungry Bitcoin.

If and when Tesla marks a major top, that could trigger or coincide with a big stock market top.

Stock Market Analysis

Last week the Nasdaq had a tame pullback, finding support where you’d expect at the 21-day line. Is the pullback or rotation out of speculative growth over? Friday’s lackluster action, with the Nasdaq closing near session lows, wasn’t inspiring.

If the stock market rally rebounds quickly, how much is there to run? The Nasdaq closed Friday 5.1% above its 50-day line. That’s not extended, but not far from being so once again.

Meanwhile, other indicators continue flash warning signs. Margin debt surged 42% in January vs. a year earlier. That’s the most since late 2007, though still below the 55% annual gain associated with major market tops. However, the rise of leveraged ETFs and skyrocketing use of call options suggest that investor leverage is significantly higher than margin debt alone. Also, margin debt year-over-year comparisons will get easier in February and March, as investors exited during the coronavirus crash.

All of that investor leverage, fueled by Fed policy, stimulus checks and millions of Americans stuck at home in a zero-fee trading era, have helped drive the enormous stock market rally. But if the market has a significant correction, that can spur an big drop in leverage, spurring further selling.

Right now, the stock market rally still looks strong. And over the past 10 months, pullbacks have generally been shallow and short lived. Even the two-month correction last fall was relatively modest for a correction. But at some point the stock market rally will turn into a major correction or bear market. Enjoy this stock market rally, but stay disciplined and prepared for a change in character.

What To Do Now

Great stock market rallies make bad teachers. But at this stage of the rally, investors should follow the rules and do their homework.

Check your individual holdings and overall exposure. Have a game plan for your stocks and stress test your portfolio.

It’s a good idea to check out or rewatch Wednesday’s IBD Live show featuring David Ryan. Ryan stressed the importance of sound bases and the need for sell rules. Ryan also noted the strength in many cyclical stocks and financials.

CAN SLIM investors should focus on leading stocks but it’s a good idea to have a diversity of leadership. Many mining, agricultural and bank stocks have been strong performers in recent months. Having some of those names can help avoid major drawdowns in your portfolio. Having even pilot positions in a variety of top groups will help you stay aware of strength in those areas. That could lead to further buys in those fields, especially if frothy areas of the market face more trouble.

All of this means being prudent and cautiously bullish, not bearish. It is still a strong stock market rally. There are good reasons to be significantly invested.

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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