Dow Jones futures will open Sunday evening, along with S&P 500 futures and Nasdaq futures, with attention squarely on the CPI inflation report and the Federal Reserve.

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The stock market rally retreated last week with the major indexes continuing their trend of popping to new highs but then fading back. It’s a challenging environment for buying stocks.

This coming week investors get a one-two shot of big economic news. On Tuesday, the Labor Department will release its November CPI inflation report. On Wednesday afternoon, the Federal Reserve will hike rates yet again with Fed chief Jerome Powell offering signals about further tightening in early 2023.

That could be a catalyst for big market gains or losses, or choppy sideways actions could continue. Investors should likely wait for the inflation report and Fed news before adding exposure.

Breakout failures or fizzles are widespread, with DXCM stock tumbling back Friday after briefly clearing a buy point Thursday on FDA approval.

But here are five stocks to watch: Dow Jones giants Caterpillar (CAT) and Goldman Sachs (GS), Sanmina (SANM), McKesson (MCK) and MercadoLibre (MELI). To be clear, none of these stocks are actionable, with MELI stock in particular needing some work.

Microsoft (MSFT) is faring relatively well for the megacaps, with Apple (AAPL) below its 50-day line and Tesla (TSLA) trying to avoid setting new bear market lows. But MSFT stock remains well below its 200-day line and hasn’t made much progress over the past month.

The video embedded in the article reviewed the market action in depth and analyzed Dexcom (DXCM), MercadoLibre and CAT stock.

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Fed May Ditch Its 2% Inflation Target — Or Economy, S&P 500 Face Hard Landing

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CPI Inflation And Fed Meeting

Early Tuesday, the Labor Department will release the November consumer price index. Overall and core CPI inflation rates should cool over the next several months, if only because comparisons are getting tougher. But services prices have been stubbornly strong.

The Federal Reserve wants to see more-substantial declines on services inflation, as well as wage gains, before halting rate hikes. At 2 p.m. ET, the Fed is expected to raise its fed funds rate by 50 basis points, to 4.25%-4.5%, ending a string of four 75-basis-point hikes. Investors will want some clues about the February meeting, and how high the fed funds rate may ultimate reach. Markets are currently pricing in another half-point Fed rate hike in February, though there’s a decent chance of a quarter-point move.

Fed chief Powell’s comments at 2:30 p.m. ET, along with the CPI inflation report, may set the tone on Fed policy heading into 2023.

Powell and several policymakers have signaled that a recession may be necessary to bring inflation under control.

Dow Jones Futures Today

Dow Jones futures open at 6 p.m. ET on 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.

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

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Stock Market Rally

The stock market rally saw significant retreats for key indexes in the latest week.

The Dow Jones Industrial Average sank 2.8% in last week’s stock market trading. The S&P 500 index lost 3.4%. The Nasdaq composite tumbled 4%. The small-cap Russell 2000 plunged 5%.

The 10-year Treasury yield rose 6 basis points to 3.57%, rebounding from 3.4% midweek.

U.S. crude oil futures plunged 11% to $71.02 a barrel last week, with gasoline futures tumbling 9.8%. Both hit 2022 lows. Natural gas prices dipped 0.6%.

ETFs

Among key growth ETFs, the iShares Expanded Tech-Software Sector ETF (IGV) slumped 4.6%, with Microsoft stock a major holding. The VanEck Vectors Semiconductor ETF (SMH) retreated 1.7%.

Reflecting more-speculative story stocks, ARK Innovation ETF (ARKK) tumbled 9.2% last week and ARK Genomics ETF (ARKG) 8.1%. TSLA stock is a massive holding across Ark Invest’s ETFs.

SPDR S&P Metals & Mining ETF (XME) gave up 6.4% last week. The Global X U.S. Infrastructure Development ETF (PAVE) fell back 2.85%. U.S. Global Jets ETF (JETS) descended 3.3%. SPDR S&P Homebuilders ETF (XHB) fell 2%. The Energy Select SPDR ETF (XLE) dived 8.45%, decisively breaking its 50-day line. The Financial Select SPDR ETF (XLF) retreated 3.9%. The Health Care Select Sector SPDR Fund (XLV) dropped 1.3% after climbing in eight of the prior nine weeks.

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Megacap Stocks

Apple stock fell 3.8% in the past week, tumbling below that key level Tuesday and hitting resistance there on Friday. Bad news on iPhone production might be priced in, and AAPL stock is rebounding.

Fellow Dow tech titan Microsoft stock also sank 3.8%, but held support at the 21-day line, modestly above a just-rising 50-day. But it’s well below the 200-day line. MSFT stock is essentially flat vs. a month ago, much like the S&P 500 and Nasdaq.

Tesla stock tumbled 8.1% in the latest week, even with Friday’s 3.2% pop. TSLA stock is jumping above recent bear market lows. Tesla announced new China incentives this past week with widespread media reports that the Shanghai plant will cut production significantly over the next few weeks, even halting Model Y output.

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Stocks To Watch

Caterpillar stock fell 3.7% to 227.29 last week, undercutting the 21-day line. The retreat could end up being a constructive shakeout. CAT stock has a buy point at 238 or 239.95 from a long cup base. In another week, the Dow heavy equipment giant could have a flat base with that 239.95 buy point. A slightly longer pause would let the fast-rising 50-day line narrow the gap with CAT stock.

Goldman stock slumped 5.6% in the latest week to 359.14, round-tripping a breakout from a cup base with a 358.72 buy point, before rising slightly above it. A solid bounce from here could offer a new entry, especially if the 50-day or 10-week line catch up. On a weekly chart GS stock has a 13-month cup-with-handle base, with a 389.68 buy point, according to MarketSmith analysis. The past week has now created more depth on that handle, which also could become a flat base in a week.

Sanmina stock slumped 7.3% to 62.48 this past week. SANM stock had been consolidating tightly in the profit-taking zone after an October breakout from a cup base. Shares could be starting a pullback to the 50-day/10-week line, offering a buying opportunity, though the weekly drop was abrupt. SANM stock also is working on a possible flat base.

McKesson stock fell 4% to 371.37 last week, dropping Friday to just below the 50-day and 10-week lines. MCK stock is working on a new consolidation after a sharp sell-off on Nov. 10-11 that slammed many defensive medical stocks. A move above the Dec. 2 high of 389.45 could offer an early entry, still close to moving averages.

MELI stock sank 5.1% to 896.48, its fourth straight weekly decline. The Latin American e-commerce and payments giant has a 1,095.44 buy point, with a trendline entry around 1,025. An aggressive entry could be a decisive retaking of MELI stock’s moving averages, with the Dec. 2 high of 957 as that trigger. While MercadoLibre stock has been trending lower, the weekly losses come on lighter volume with some relatively strong positive closes.

Market Rally Analysis

A week ago, the stock market rally was hitting new highs, with the S&P 500 above its 200-day line for the first time in months. But as investors re-evaluated the jobs report and Fed chief Powell’s comments, the major indexes retreated.

The S&P 500 fell below its 200-day line, while the Nasdaq tested its 50-day. Both hit resistance at the 21-day line late in the week. The Russell 2000 tumbled below its 200-day and 21-day lines and came right down to its 50-day, just undercutting its 10-week line.

The rally-leading Dow is holding support around its 21-day.

The S&P 500 is basically where it was after Nov. 10, when a tame October CPI inflation report buoyed stocks. The Nasdaq and Russell 2000 are back to those early November levels, but also late October peaks.

If you had to design a scenario to lure investors in to get roughed up repeatedly, this current uptrend might be the blueprint: A market rally of a few big one-day gains followed by pullbacks over several sessions.

It’s still a confirmed market rally. However, further losses, such as the Nasdaq or especially the S&P 500 clearly breaking their 50-day lines, would be worrisome.

Tuesday’s November CPI inflation report and Wednesday’s Fed meeting announcement and Powell’s comments could provide a catalyst for a sustained market rally, or a decisive sell-off. But they also could spur yet another big market pop that seems decisive, only to be followed by yet another pullback or bounce.

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What To Do Now

Investors should be wary of adding exposure until the CPI inflation report and Fed meeting are in the rearview mirror. Even if markets jump on the inflation data and Fed chief Powell’s comments, investors should be selective about new buys, in case the major indexes simply fall back over the next several sessions.

At some point a sustained, steady market rally will take hold. When that happens, buying opportunities will be plentiful.

So get your stock market holiday shopping list ready. A large number of stocks from a variety of sectors are setting up or close to doing so.

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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