Dow Jones Futures Fall As Deutsche Bank Becomes Latest Bank Pain Point
Dow Jones futures fell along with S&P 500 futures and Nasdaq futures on Friday morning as Deutsche Bank shares sold off on rising default risks.
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Bank stocks tumbled earlier on Thursday as an attempt to rally the market jerked and diverged. The Nasdaq closed solidly higher but well below its best levels, while the Russell 2000 hit a fresh 2023 low as Moody’s Investor Service warned of broader bank contagion and economic fallout. Stocks rebounded late as Treasury Secretary Janet Yellen pledged “additional measures” on bank deposits if needed.
First Republic (FRC) slipped to record lows and PacWest Bancorp (PACW) to an all-time closing low. But also supra-regional such as e.g KeyCorp (KEY) and Comerica (CMA) also sold out, with even some giants like Bank of America (BAC) touches multi-year lows.
Meritage houses (MTH) and KBH stock flashed buy signals amid stronger ones KB Home (KBH) Result. Microsoft (MSFT) traded back above a buy point. Yum China (YUMC) broke out. The VanEck Semiconductor ETF (SMH) cleared a buy point, providing a way to play in the chip sector with NVDA stocks and many extended hot semis.
MTH stock and NVIDIA (NVDA) are on the IBD Leaderboard. MSFT shares are Long-Term Leaders on IBD. Meritage and KBH shares are in the IBD 50 along with several other home builders. Meritage Homes is Thursday’s IBD stock of the day.
But investors should remain cautious. Yes, a rally attempt is underway, but it’s still a market correction. Rally attempt remains divided and volatile with banking sector a big negative.
Deutsche Bank is the latest concern
Banking fears shifted again from US regional banks to European giants on Friday.
DB shares plunged 11% early Friday as the cost of insurance against default soared. Deutsche Bank shares slipped 6% Thursday to a five-month low. The German giant has long been a troubled bank. Other European bank stocks also fell.
In the US, regional banks and giants like First Republic and BAC stocks fell slightly to solid ahead of the open.
Moody’s: “Turbulence” at a broader bank is a risk
There is a rising risk that regulators “will be unable to contain the current turmoil without prolonged and potentially severe repercussions inside and outside the banking sector.” That could cause greater “financial and economic damage than we anticipated,” Moody’s Investor Service warned on Thursday. Nevertheless, the rating agency expects the policy to be “largely successful”.
Bank stocks and major indices came off their afternoon lows as Treasury Secretary Yellen said in prepared remarks to a House committee that the government “would be ready to take additional action where warranted”.
That line aside, Yellen largely echoed remarks made Wednesday before a Senate panel when she said officials are not trying to provide a “blanket” guarantee on all deposits at all banks. This comment helped trigger the market reversal lower on Wednesday. However, Yellen had previously hinted that any bank struggling will push for more deposit insurance.
The FDIC plans to announce the fate of SVB Financial’s Silicon Valley bank over the weekend, Barron’s Advisor reported Thursday.
Dow Jones futures today
Dow Jones futures fell 1% from fair value. S&P 500 futures lost 0.9% and Nasdaq 100 futures 0.6%. Futures suggest the S&P 500 will undercut its 200-day moving average on Friday.
The 10-year government bond yield fell 11 basis points to 3.3%. The 2-year yield fell 22 points to 3.59%.
Crude oil futures fell more than 3%.
Keep in mind that overnight action in Dow futures and elsewhere doesn’t necessarily translate to actual trading in the next regular trading session.
Join IBD experts as they analyze actionable stocks in the stock market rally on IBD Live
stock market rally
An attempt at the stock market rally wiped out large intraday gains, although major indices closed higher after being mixed in the afternoon.
The Dow Jones Industrial Average rose 0.2% in trading on Thursday. The S&P 500 index rose 0.3%, with Zion Bancorp (ZION), Comerica and KEY lead the bottom three. The Nasdaq Composite rose 1%. Small-cap Russell 2000 fell 0.8%.
US crude prices fell 1.3% to $69.95 a barrel. Copper futures rallied 1.9%, up 7.5% on a six-session winning streak.
The 10-year government bond yield fell 9 basis points to 3.41%. The two-year yield fell 17 basis points to 3.81%.
Despite the Fed signaling on Wednesday that the central bank will hike again, markets see a 66% chance of a pause in May, up from 50.1% on Wednesday and 39.7% on Tuesday. Investors are expecting the Fed to start cutting interest rates this summer.
ETFs
Among growth ETFs, Innovator IBD 50 ETF (FFTY) is up 1.2%, while Innovator IBD Breakout Opportunities ETF (BOUT) is up 0.7%. The iShares Expanded Tech-Software Sector ETF (IGV) gained 1.5%, with Microsoft shares a key component. The VanEck Vectors Semiconductor ETF (SMH) is up 2.7%. NVDA stock is a large SMH holding.
ARK Innovation ETF (ARKK) fell 1.5% and ARK Genomics ETF (ARKG) gained 0.7%, reflecting more speculative story stocks. coin base (COIN) and Square parent block (SQ), both of Ark Invest’s top 10 stocks, fell more than 10% on Thursday.
The SPDR S&P Metals & Mining ETF (XME) was modestly up 0.3% and the Global X US Infrastructure Development ETF (PAVE) was down 0.3%. The US Global Jets ETF (JETS) fell 1%. The SPDR S&P Homebuilders ETF (XHB) closed just below breakeven. The Energy Select SPDR ETF (XLE) is down 1.4%. The Health Care Select Sector SPDR Fund (XLV) fell 0.2%.
The Financial Select SPDR ETF (XLF) fell 0.7%, marking a five-month low. BAC stock is a notable XLF holding. The SPDR S&P Regional Banking ETF fell 2.8%, hitting its worst level since late 2020. Stocks of First Republic, PACW, KEY, and CMA are all KRE holdings.
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Analysis of the market rally
For a second straight session, the market rally attempt has smashed away large intraday gains. On Wednesday, the major indices turned significantly lower. They closed higher on Thursday, but it wasn’t the action you’d want to see in a market rally.
The Nasdaq was up thanks to megacap technologies like Microsoft stock, Nvidia and meta platforms (META). But it was an inside day that gave up more than half of its 2.5% intraday jump.
The S&P 500 rallied off its 200-day moving average but faced resistance near its 50-day moving average. The Invesco S&P 500 Equal Weight ETF (RSP), which is not dominated by these megacap technologies, fell 0.35% to mark a 5-month intraday low.
The Dow Jones tried to retake the 200-day moving average but collapsed its gains. The Russell 2000 opened strong but reversed lower as bank stocks deteriorated again.
The chip sector continues to look resilient. nvidia stock, Aehr test systems (AEHR) and some others have higher performance but are generally enhanced. Some others, such as Applied Materials (AMAT), are near buy areas but not really outperforming the SMH ETF.
Builders look strong. Shares of KBH and Meritage rallied towards official buy points but pared gains during the day.
YUMC stock broke out of a flat base. Yum China’s profits are set to boom in 2023 when Covid restrictions are lifted.
But the width is narrow.
A sustained market recovery is almost impossible if the banking crisis worsens. SVB Financial was an outlier in many ways, so it boded badly that other California-based banks like FRC Stock and PacWest came under pressure. Far worse when supra-regional stocks like CMA shares and KeyCorp start to buckle. BAC stock is at its worst since 2020. Even JPMorgan Chase (IBD), one of the best capitalized banks, is testing the recent lows from 2023 and its 200-day moving average.
Ex-FDIC chief Sheila Bair told MarketWatch on Thursday that the issue of unrealized bond losses “is a risk facing all banks,” not just regional players.
Time the market with IBD’s ETF market strategy
What now
The market rally attempt is divided, volatile and news driven. It is not a confirmed uptrend.
Investors can try playing some leaders. But while some, like Nvidia and When holding (ONON) have worked, many others have fizzled out. Anyone who bought stocks on strength over the past two days is likely sitting on at least modest losses.
So keep your exposure bright and reduce losses quickly. For winners, consider taking at least partial wins quickly to ensure you end up making a profit.
There’s nothing wrong with staying all or entirely in cash until there’s a sustained market rally with banking headlines in the background.
In any case, investors should remain engaged and ready to act. That means you’re prepared with up-to-date watch lists and your exit strategies ready.
Read The Big Picture every day to keep up with 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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