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Business

Treasury Market Had a Cow, Mortgage Rates Jumped, Wall Street Crybabies Clamored for Help, But the Fed Smiled Satisfied Upon its Creation

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Junk bonds still in la-la-land as investors chase yield – risks be damned.

By Wolf Richter for WOLF STREET.

The bond market settled down on Friday. And that was a good thing for the crybabies on Wall Street that had started to hyperventilate on Thursday, when the Treasury 10-year yield, after rising for months, and accelerating over the past two weeks, had spiked to 1.52%, having tripled since August.

By Thursday, all kinds of complex leveraged trades had been coming apart, and forced selling had set in. By historical standards, and given the inflation pressures now underway, those yields even on Thursday were still astonishingly low. But Wall Street had a cow, for sure.

On Friday, the Treasury 10-year yield dropped 8 basis points, part of the 14-basis-point spike on Thursday, and closed at 1.44%, still higher than where it had been a year ago on February 21, 2020.

Yields rise because bond prices fall, producing a world of hurt – reflected in bond funds focused on long-dated Treasury bonds, such as the iShares 20 Plus Year Treasury Bond ETF [TLT]; its price is down about 16% from early August, after the 3.3% relief-bounce on Friday.

The Fed approves.

The governors of the Federal Reserve have been speaking in one voice on the rise in Treasury yields: It’s a good sign, a sign of rising inflation expectations and a sign of economic growth. That is the mantra they keep repeating.

Fed Chair Jerome Powell called the surge in Treasury yields “a statement of confidence.”

Kansas City Fed president Esther George said on Thursday: “Much of this increase likely reflects growing optimism in the strength of the recovery and could be viewed as an encouraging sign of increasing growth expectations.”

St. Louis Fed president James Bullard, one of the most passionate doves, said on Thursday: “With growth prospects improving and inflation expectations rising, the concordant rise in the 10-year Treasury yield is appropriate.” Investors demanding higher yields to offset higher inflation expectations “would be a welcome development.”

They’re all singing from the same page: They’re dovish on QE and low rates. But they’re going to let long-term rates rise, which is starting to tamp down on some of the ridiculous froth in the financial markets and the housing market.

Those Fed pronouncements on Thursday morning in support of higher long-term yields – when the markets were clamoring for the opposite, more QE but focused on long maturities to bring down long-term yields – probably also helped unnerving Wall Street.

But on Friday, the mini-panic settled back down, and that’s good because a real panic could change the Fed’s attitude.

The 30-year yield on Friday dropped by 16 basis points, to 2.17%, erasing the jump of the prior three days. It’s now where it had been on January 23 last year:

The yield curve as measured by the difference between the 2-year yield and the 10-year yield had been steepening sharply, with the 2-year yield glued in place, and with the 10-year yield taking off. On Friday, the spread between the two narrowed to 1.30 percentage points, from Thursday’s 1.35 percentage points, still making for the steepest yield curve by this measure since December 2016.

In August 2019, the yield curve by this measure briefly “inverted” when the 10-year yield dropped below the 2-year yield, turning the spread negative. The yield curve has steepened ever since in a very rough-and-tumble manner:

And mortgage rates finally started to follow.

The average 30-year fixed mortgage rate rose to 2.97% during the week ended Wednesday, as reported by Freddie Mac on Thursday. This does not yet include the moves on Thursday and Friday.

The 30-year mortgage rate normally tracks the 10-year yield fairly closely. But in 2020, they disconnected. When the 10-year yield started rising in August, the mortgage market just ignored it, and mortgage rates continued dropping from record low to record low until early January, whipping the housing market into super froth.

But then in early January, mortgage rates started climbing and have now risen by 32 basis points in less than two months — though they remain historically low.

Note the disconnect in 2020 between the weekly Treasury 10-year yield (red) and Freddy Mac’s weekly measure of the average 30-year fixed mortgage rate (blue):

In this incredibly frothy and overpriced bubble housing market, higher mortgage rates are eventually going to cause some second thoughts.

And that too appears to be smiled upon approvingly by the Fed. They’re not blind. They see what is going on in the housing market – what risks are piling up with this type of house price inflation. They just cannot say it out loud. But they can let long-term yields rise.

Mortgage rates have some catching up to do. The spread between the average 30-year fixed mortgage rate and the 10-year yield has been narrowing steadily since the March craziness, and at 1.37 percentage points, is the narrowest since April 2011.

The spread always reverts from extreme lows, such as this, toward the mean. It can do so in two ways, by mortgage rates rising faster than Treasury yields, or by mortgage rates falling more slowly than Treasury yields.

High-grade corporate bonds starting to feel the pain.

Yields have risen and prices have fallen across the investment grade spectrum of corporate bonds, though yields remain very low by historic measures:

AA-rated bonds yielded on average 1.81%, according to the ICE BofA AA US Corporate Index, up from the record low of 1.33% in early August (my cheat sheet for corporate bond ratings).

BBB-rated Bonds – just above junk bonds – came out of their torpor over the past two months, with the average yield climbing to 2.39%, according to the ICE BofA BBB US Corporate Index, up from the record low of 2.06% at the end of December. They, like mortgage rates had continued to fall through 2020, despite rising Treasury yields.

Junk bonds still in la-la-land, with yields near record lows.

BB-rated bonds – the highest-rated junk bonds – came out their torpor just over the past two weeks, and the average yield rose to 3.45%, according to the ICE BofA AA US Corporate Index, up from the record low in mid-February of 3.20%.

The average yield of CCC-rated bonds – at the riskiest end of the junk spectrum with a considerable chance of default – has barely ticked up from record lows in mid-February (7.17%) and now hovers at 7.27%. In March, the yield had shot up to 20%. During the Financial Crisis, it had spiked north of 40%.

The Fed smiles upon its creation.

The fact that the highest risk bonds still sport yields that are near record lows is a soothing sign for the Fed. It means that financial conditions are still extremely easy. All kinds of high-risk companies with crushed revenues and huge losses – think cruise lines with near zero revenues and losses out the wazoo – can fund their cash-burn by issuing large amounts of new bonds to over-eager yield-chasing investors, no problem.

So far this year, companies issued $84 billion in junk bonds, according to Bloomberg. At this pace, the first quarter will be the biggest in junk bond issuance ever. There is huge demand for junk bonds due to their higher yields – risks be damned. The yield chase is on in full force. And the overall junk bond market has ballooned to over $1.6 trillion.

For the Fed, this is one of many signs that credit markets are still super-frothy, even if Treasury yields have risen from record lows to still historically low levels. While it vowed to continue QE and not raise rates for a “while,” it’s also telling the markets in a unified voice that rising long term Treasury yields are a sign that the Fed’s monetary policies are working as intended. And those higher long-term yields are taking some of the froth off the markets, including eventually the housing market – and I don’t think that this is an unintentional side effect.

From crisis to crisis, and even when there’s no crisis. Read… Fed’s QE: Assets Hit $7.6 Trillion. Long-Term Treasury Yields Spike Nevertheless, Wall Street Crybabies Squeal for More QE

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Business

As rising Treasury yields spook stock investors, March looms like a lion

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After a frenetic February, investors are probably hoping that March holds true to its proverb: In like a lion out like a lamb.

Indeed, February turned out to be a doozy, with benchmark bond yields, represented by the 10-year Treasury note
TMUBMUSD10Y,
1.415%
and the 30-year long bond
TMUBMUSD10Y,
1.415%,
ringing up their biggest monthly surges since 2016, according to Dow Jones Market Data.

The move was a stark reminder to investors that bonds, considered mundane and straight-laced by some investors, can wreak havoc on the market all the same.

A final flurry of trading, some $2.5 billion in sales near Friday’s close, created a major downside drag for stocks in the final few minutes of the session and may imply that there may be more air pockets ahead before the market steadies next week.

The Dow Jones Industrial Average
DJIA,
-1.50%
and S&P 500 index
SPX,
-0.48%
barely held above their 50-day moving averages, at 30,863.07 and 3,808.40, respectively, at Friday’s close.

‘An associated 10-20% sell-off in US equities would also focus minds. But before then, the pain currently being handed out to growth-tilted equity portfolios could get worse.’ Citigroup strategists

“The turmoil is probably not over,” wrote Independent market analyst Stephen Todd, who runs Todd Market Forecast, in a daily note.

Yet, for all the bellyaching about yields running hotter than expected, stocks in February still managed to bang out solid returns. For the month, the Dow finished up 3.2%, the S&P 500 notched a 2.6% gain in February, while the Nasdaq eked out a 0.9% return, despite a 4.9% weekly loss put in on Friday that marked the worst weekly skid since Oct.30.

Many have made the case that a selloff in the technology-heavy Nasdaq Composite was inevitable, especially with buzzy stocks like Tesla Inc.
TSLA,
-0.99%
only getting frothier by some measures.

“But the market has been overbought and extended all year and arguably for several months in late-2020,” wrote Jeff Hirsch, editor of the Stock Trader’s Almanac, in a note dated Thursday.

“After the big run-up in the first half of February folks have been looking for an excuse to take profits,” he wrote, describing February as the weak link in what’s usually the best six-month period of gains for the stock market.

The beneficiaries of the recent move in yields so far appear to be banks, which are benefitting from a steeper yield curve as long dated Treasury yields rise, and the S&P 500 financials sector
SP500.40,
-1.97%

XLF,
-1.91%
finished down 0.4%, which is, as it turns out, was the second-best weekly performance of the index’s 11 sectors behind energy
SP500.10,
-2.30%,
which surged 4.3%.

Utilities
SP500.55,
-1.86%
were the worst performer, down 5.1% on the week and consumer discretionary
SP500.25,
+0.58%
was second-worst, off 4.9%.

In February, energy logged a 21.5% gain as crude oil prices rose, while financials rose 11.4% on the month, booking the best and second-best monthly performances.

So what’s in store for March?

“Typical March trading comes in like a lion and out like a lamb with strength during the first few trading days followed by choppy to lower trading until mid-month when the market tends to rebound higher,” Hirsch writes.

March also sees “triple witching: occur on the third Friday, when stock options, stock-index futures and stock-index option contracts expire simultaneously.

Ultimately, seasonal trends suggest that March will be wobbly and could be used as an excuse for further selling, but on that downturn may be cathartic and give way to further gains in the spring.

“Further consolidation is likely in March, but we expect the market to find support shortly and subsequently challenge the recent highs again,” writes Hirsch, noting that April is statistically the best month of the year.


Stock Trader’s Almanac

Looking beyond seasonal trends, it isn’t certain how the rise in bond yields will play out and ultimately ripple through markets.

On Friday, the benchmark 10-year note closed at a yield of 1.459% based on 3 p.m. Eastern close, and hit an intraday peak at 1.558%, according to FactSet data. The dividend yield for S&P 500 companies in aggregate was at 1.5%, by comparison, while the Dow it is 2% and for the Nasdaq Composite is 0.7%.

As to the question of to what degree rising yields will pose a problem for equities, strategists at Citigroup make the case that yields are likely to continue to rise but the advance will be checked by the Federal Reserve at some point.

“It is unlikely that the Fed will let US real yields rise much above 0%, given high levels of public and private sector leverage,” analysts on Citi’s global strategy team wrote in a note dated Friday titled “Rising Real Yields: What to do.”

Real adjusted yields are typically associated with rates on Treasury inflation-protected securities, or TIPS, which compensate investors based on expectations for inflation.

Real yields have been running negative, which have been arguably encouraging risk taking but the coronavirus vaccine rollouts, with a Food and Drug Administration panel on Friday recommending approval for Johnson & Johnson’s
JNJ,
-2.64%
one-jab vaccine and the prospects for further COVID aid from Congress, are raising the outlook for inflation.

Citi notes that the 10 year TIPS yields dropped below minus 1% as the Fed’s quantitative easing last year was kicked off to help ease stresses in financial markets created by the pandemic, but in the past few weeks the strategists note that TIPs had climbed to minus 0.6%.

Read: Here’s what one hedge fund trader says happened in Thursday’s bond-market tantrum, which sent the 10-year Treasury yield to 1.60%

Citi speculates that the Fed might not intervene to stem disruptions in the market until investors see more pain, with the 10-year potentially hitting 2% before alarm bells ring, which would bring real yields closer to 0%.

“An associated 10-20% sell-off in US equities would also focus minds. But before then, the pain currently being handed out to Growth-tilted equity portfolios could get worse,” the Citi analysts write.

Check out: Cracks in this multidecade relationship between stocks and bonds could roil Wall Street

Yikes!

The analysts don’t appear to be adopting a bearish posture per se but they do warn that a return to yields that are closer to the historically normal might be painful for investors heavily invested in growth stock names compared against assets, including energy and financials, that are considered value investments.

Meanwhile, markets will be looking for more clarity on the health of the labor market this coming Friday when nonfarm payrolls data for February are released. One big question about that key gauge of the health of U.S. employment, beyond how the market will react to good news in the face of rising yields, is the impact the colder than normal February weather have on the data.

In addition to jobs data, investors will be watching this week for manufacturing reports for February from the Institute for Supply Management and construction spending on Monday. Services sector data for the month are due on Wednesday, along with a private-sector payroll report from Automatic Data Processing.

Read: Current bond-market selloff worse than ‘taper tantrum’ in one key way, argues analyst

Also read: 3 reasons the rise in bond yields is gaining steam and rattling the stock market

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Business

Dow Jones Futures: Market Rally Breaks Support As Treasury Yields Soar; Nvidia, Teladoc, Tesla Flash Sell Signals

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Dow Jones futures were mixed Thursday night, along with S&P 500 futures and Nasdaq futures. The stock market rally suffered heavy losses Thursday as the 10-year Treasury yields continued to soar. This time the Nasdaq did not rally off lows, closing below key support.




X



Nvidia (NVDA) and Teladoc Health (TDOC) joined stocks round-tripping sizable gains, while Tesla (TSLA) plunged further below its 10-week line. Investors should be playing defense, especially with tech stocks. For those waiting to see how big winners held up at the end of the week, some key sell or hold decisions are coming.

Meanwhile, GameStop (GME) came well off its intraday high. GME stock rose 19% to 108.73 after doubling on Wednesday. But it came way off its intraday high of 184.68. AMC Entertainment (AMC) and Express (EXPR), two other squeeze plays that leapt Thursday morning, closed down. GME stock retreated overnight in active trade.

Key Earnings Reports

Zscaler (ZS), Etsy (ETSY), Salesforce.com (CRM), Autodesk (ADSK), Farfetch (FTCH), Airbnb (ABNB) and DoorDash (DASH) headlined a slew of earnings reports after the close.

Etsy, Zscaler, Salesforce, Autodesk and Farfetch topped earnings views. Airbnb and DoorDash reported huge quarterly losses in their first quarterly reports since their late 2020 IPOs, but beat on revenue.

Etsy stock jumped in late trade, just exceeding Thursday’s 5.5% drop. Zscaler stock climbed, recouping most of its 5.8% regular-session loss. Salesforce stock retreated overnight on weak guidance after CRM closed down 3.9%. Farfetch stock also fell in extended trade, extending a 4.15% Thursday’s slide. ADSK stock declined overnight after a 5% slump.

ABNB stock edged higher overnight after tumbling 9.1% Thursday. DASH stock sold off after closing with a 5.4% decline.

DraftKings (DKNG) reports early Friday.

Investors have been less forgiving of earnings results in the current market climate, even when profits and guidance appear strong. Nvidia stock tumbled 8.2% Thursday following earnings. Teladoc, Innovative Industrial Properties (IIPR), Progyny (PGNY), NetApp (NTAP) and Novocure (NVCR) all suffered double-digit losses.

Tesla stock and Nvidia are on IBD Leaderboard. CRM stock is on IBD Long-Term Leaders. Tesla and Etsy stock are on the IBD 50.

Dow Jones Futures Today

Dow Jones futures dipped 0.1% vs. fair value. S&P 500 futures lost 0.1%. Nasdaq 100 futures retreated 0.6%. Futures were somewhat volatile overnight, which is not surprising given the big market moves this week.

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 113.53 million. Covid-19 deaths topped 2.51 million.

Coronavirus cases in the U.S. have hit 29.05 million, with deaths above 520,000.

Stock Market Rally

The stock market rally suffered broad-based losses Thursday, with growth continuing to lead the downside.

The Dow Jones Industrial Average sank 1.75% in Thursday’s stock market trading, a day after hitting a record high. The S&P 500 index skidded 2.45%, but found support at the 50-day line. The Nasdaq composite plunged 3.5%, closing below its 50-day line for the first time since Nov. 3. It is still above Tuesday’s intraday low.

The 10-year Treasury yield jumped 14 basis points to 1.52%. That surging yield has been putting pressure on growth stocks.

Nvidia reported strong earnings and guidance, but plunged 8.2% to 532.30. That’s more than round-tripped a 10% gain from the 560.07 buy point and is now below the 50-day line. Nvidia rose slightly overnight as CEO Jen-Hsun “Jensen” Huang told CNBC’s Jim Cramer that he’s confident that the Arm Holdings takeover will go through.

Teladoc stock plunged 14% to 219.55. That wiped out a 30% run from a 236.76 handle entry and is now 7.3% below the buy point. TDOC stock is also well below its 50-day line.

Among the best ETFs, the Innovator IBD 50 ETF (FFTY) fell 4.4%, while the Innovator IBD Breakout Opportunities ETF (BOUT) sank 5.5%. The iShares Expanded Tech-Software Sector ETF (IGV) fell 3.9%. The VanEck Vectors Semiconductor ETF (SMH) skidded 5.6%, with Nvidia stock a key holding.

Reflecting more-speculative story stocks, Ark Innovation ETF sank 6.4% and Ark Genomics ETF 5.8%. Their parent ARK Invest’s biggest holding is Tesla stock, and it was bulking up on the EV maker earlier in the week. TDOC stock is another top-five holding. and ARK bought a lot of Teladoc shares Thursday.

With ARK Invest starting to see withdrawals, its release of daily buys and sells may make it hard to exit positions, especially in less-liquid names.

ARKK and ARKG fell overnight as Tesla and tech futures retreated.

Market Rally Analysis

Whether we’re in a broad market retreat or a sharp sector rotation, growth stocks are reeling. The Nasdaq composite has hit resistance at the 21-day exponential moving average and is now below its 50-day. The tech-heavy index is down 5.4% this week after sliding 1.6% last week.

Perhaps this is the moment that the stock market rally regains its footing. But the current trend is not your friend. Also, even if the market does start to move higher, that doesn’t mean the speculative growth names of the past year will lead the way or even advance. Cyclicals and financials have held up well this week, and might continue to lead.

The Dow Jones is off just 0.3% for the week, and is only down because of tech titans Apple (AAPL) and Microsoft (MSFT).

Weekly Sell Signals

Investors should always sell a stock if it falls 7%-8% below the purchase price, and they shouldn’t let a double-digit gain turn into a loss, as with Nvidia and Teladoc.

But selling winning stocks is both an art and a science. One way to minimize panic selling is to wait to see how a stock finishes out the week before selling or completely closing out a position. If a stock is decisively below its 10-week line — 2% or more — that can be a sell signal. (Sometimes a stock will have support areas slightly below the 10-week line, so investors might wait for a break of those levels as well.)

But if a stock is decisively below such support, do you sell? A lot of that comes down to your cost basis. If you’re seeing a 30% gain whittled down to under 10%, you might want to get out while you still have a gain. If you’re still up 100%, then you have more leeway. Your conviction also is key. If you believe a stock has the potential for big gains from current levels, you may want to preserve the bulk of this position. If you don’t have that conviction you might cash in your chips.

Tesla stock is 13% below its 10-week line, falling sharply this week in heavy volume. That would be a sell signal, but not an automatic one.

If you bought at the 466 buy point in November, you’ve seen a 93% gain cut in half to a still-hefty 46%. You probably wouldn’t want to see much more of that gain evaporate. If you bought around 290 or 174, holding Tesla stock would be even easier to justify. But selling much or all of your Tesla stock would also be understandable.

Selling Early Pays Off

As the Nasdaq became extended in January and February, IBD suggested selling into strength and cutting exposure in various pullbacks. The goal was to lock in some profits and preserve capital when market conditions and individual stock action became a little dicey.

In the very short run, stocks may have continued running higher. But on Thursday, the Nasdaq closed about where it was on Jan. 13. The FFTY ETF is back to where it was on Jan. 14 while ARKK is at pre-Christmas levels. Broadly speaking, if you took profits from mid-January to early February, you’re in a better position today.

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.

YOU MAY ALSO LIKE:

Why This IBD Tool Simplifies The Search For Top Stocks

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Want To Get Quick Profits And Avoid Big Losses? Try SwingTrader

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Business

Dow Jones Futures: Market Rally Breaks Support As Treasury Yields Soar; Nvidia, Teladoc, Tesla Sell Signals

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Dow Jones futures fell slightly Thursday night, along with S&P 500 futures and Nasdaq futures. The stock market rally suffered heavy losses Thursday as the 10-year Treasury yields continued to soar. This time the Nasdaq did not rally off lows, closing below key support.




X



Nvidia (NVDA) and Teladoc Health (TDOC) joined stocks round-tripping sizeable gains, while Tesla (TSLA) plunged further below its 10-week line. Investors should be playing defense, especially with tech stocks. For those waiting to see how big winners held up at the end of the week, some key sell or hold decisions are coming.

Meanwhile, GameStop (GME) came well off its intraday high. GME stock rose 19% to 108.73 after doubling on Wednesday. But it came way off its intraday high of 184.68. AMC Entertainment (AMC) and Express (EXPR), two other squeeze plays that leapt Thursday morning, closed down. GME stock fell overnight in active trade.

Key Earnings Reports

Zscaler (ZS), Etsy (ETSY), Salesforce.com (CRM), Autodesk (ADSK), Farfetch (FTCH), Airbnb (ABNB) and Doordash (DASH) headlined a slew of earnings reports after the close.

Etsy, Zscaler, Salesforce, Autodesk and Farfetch topped earnings views. Airbnb and DoorDash reported huge quarterly losses in their first quarterly reports since their late 2020 IPOs, but beat on revenue.

Etsy stock jumped in late trade, reclaiming Thursday’s 5.5% drop. Zscaler stock climbed, recouping most of its 5.8% regular-session loss. Salesforce stock retreated overnight on weak guidance after CRM closed down 3.9%. Farfetch stock also fell in extended trade, extending a 4.15% Thursday’s slide. ADSK stock edged lower after a 5% slump.

ABNB stock rose modestly overnight after tumbling 9.1% Thursday. DASH stock sold off after closing with a 5.4% decline.

DraftKings (DKNG) reports early Friday.

Investors have been less forgiving of earnings results in the current market climate, even when profits and guidance appear strong. Nvidia stock tumbled 8.2% Thursday following earnings. Teladoc, Innovative Industrial Properties (IIPR), Progyny (PGNY), NetApp (NTAP) and Novocure (NVCR) all suffered double-digit losses.

Tesla stock and Nvidia are on IBD Leaderboard. CRM stock is on IBD Long-Term Leaders. Tesla and Etsy stock are on the IBD 50.

Dow Jones Futures Today

Dow Jones futures fell less than 0.1% vs. fair value. S&P 500 futures lost a fraction. Nasdaq 100 futures retreated 0.1%.

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 113.50 million. Covid-19 deaths topped 2.51 million.

Coronavirus cases in the U.S. have hit 29.04 million, with deaths above 520,000.

Stock Market Rally

The stock market rally suffered broad-based losses Thursday, with growth continuing to lead the downside.

The Dow Jones Industrial Average sank 1.75% in Thursday’s stock market trading, a day after hitting a record high. The S&P 500 index skidded 2.45%, but finding support at the 50-day line. The Nasdaq composite plunged 3.5%, closing below its 50-day line for the first time since Nov. 3. It is still above Tuesday’s intraday low.

The 10-year Treasury yield jumped 14 basis points to 1.52%. That surging yield has been putting pressure on growth stocks.

Nvidia reported strong earnings and guidance, but plunged 8.2% to 532.30. That’s more than round-tripped a 10% gain from the 560.07 buy point of 560.07 and is now below the 50-day line. Teladoc stock plunged 14% to 219.55. That wiped out a 30% run from a 236.76 handle entry and is now 7.3% below the buy point. TDOC stock is also well below its 50-day line.

Among the best ETFs, the Innovator IBD 50 ETF (FFTY) fell 4.4%, while the Innovator IBD Breakout Opportunities ETF (BOUT) sank 5.5%.  The iShares Expanded Tech-Software Sector ETF (IGV) fell 3.9%. The VanEck Vectors Semiconductor ETF (SMH) skidded 5.6%, with Nvidia stock a key holding.

Reflecting more-speculative story stocks, Ark Innovation ETF sank 6.4% and Ark Genomics ETF 5.8%. ARK Invest’s biggest holding is Tesla stock, bulking up on the EV maker earlier in the week. TDOC stock is another top-five holding.

With ARK Invest starting to see withdrawals, its release of daily buys and sells may make it hard to exit positions, especially in less liquid-names.

Market Rally Analysis

Whether we’re in a broad market retreat or a sharp sector rotation, growth stocks are reeling. The Nasdaq composite has hit resistance at the 21-day exponential moving average and is now below its 50-day. The tech-heavy index is down 5.4% this week after sliding 1.6% last week.

Perhaps this is the moment that the stock market rally regains their footing. But the current trend is not your friend. Also, even if the market does start to move higher, that doesn’t mean the speculative growth names of the past year will lead the way or even advance. Cyclicals and financials have held up well this week, and might continue to lead.

The Dow Jones is off just 0.3% for the week, and is only down because of tech titans Apple (AAPL) and Microsoft (MSFT).

Weekly Sell Signals

Investors should always sell a stock if it falls 7%-8% below the purchase price, and they shouldn’t let a double-digit gain turn into a loss, as with Nvidia and Teladoc.

But selling winning stocks is both an art and a science. One way to try minimize panic selling is to wait to see how a stock finishes out the week before selling or completely closing out a position. If a stock is decisively below its 10-week line — 2% or more — that can be a sell signal. (Sometimes a stock will have support areas slightly below the 10-week line, so investors might wait for a break of those levels as well.)

But if a stock is decisively below such support, do you sell? A lot of that comes down to your cost basis. If you’re seeing a 30% gain whittled down to under 10%, you might want to get out while you still have a gain. If you’re still up 100%, then you have more leeway. Your conviction also is key. If you believe a stock has the potential for big gains from current levels, you may want to preserve the bulk of this position. If you don’t have that conviction you might cash in your chips.

Tesla stock is 13% below its 10-week line, falling sharply this week in heavy volume. That would be a sell signal, but not an automatic one.

If you bought at the 466 buy point in November, you’ve seen a 93% gain cut in half to a still-hefty 46%. You probably wouldn’t want to see much more of that gain evaporate. If you bought around 290 or 174, holding Tesla stock would be even easier to justify. But selling much or all of your Tesla stock would also be understandable.

Selling Early Pays Off

As the Nasdaq became extended in January and February, IBD suggested selling into strength and cutting exposure in various pullbacks. The goal was to lock in some profits and preserve capital when market conditions and individual stock action became a little dicey.

In the very short run, stocks may have continued running higher. But on Thursday, the Nasdaq closed about where it was on Jan. 13. The FFTY ETF is back to where it was on Jan. 14 while ARKK is at pre-Christmas levels. Broadly speaking, if you took profits from mid-January to early February, you’re in a better position today.

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.

YOU MAY ALSO LIKE:

Why This IBD Tool Simplifies The Search For Top Stocks

Catch The Next Big Winning Stock With MarketSmith

Want To Get Quick Profits And Avoid Big Losses? Try SwingTrader

Best Growth Stocks To Buy And Watch

IBD Digital: Unlock IBD’s Premium Stock Lists, Tools And Analysis Today



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Trump’s lawyers must get 72-hour warning if Treasury turns over president’s tax returns to Democrats: judge

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The U.S. Treasury Department must grant former President Trump’s lawyers a 72-hour warning if it allows his tax returns to be released to Democrats, a judge ruled Friday, according to a report.

U.S. Rep. Richard Neal, D-Mass., chairman of the House Ways and Means Committee, is still seeking the returns after he was refused access to them in 2019 by then-Treasury Secretary Steven Mnuchin, who claimed Democrats didn’t have a “legitimate legislative purpose” for the request, Politico reported.

Neal had cited a law that requires the Treasury to turn over tax documents at the request of House tax committees.

Democrats sued in federal court in a case that is still pending a year and a half later.

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Washington, D.C., District Court Judge Trevor McFadden, a Trump appointee, put the two-week order in place because the Treasury Department could reverse course under the new Biden administration.

He also ordered both sides to give a status report on Feb. 3.

The nomination of President Biden’s Treasury secretary pick, former Federal Reserve boss Janet Yellen, was unanimously approved by the Senate Finance Committee on Friday and now heads to the full Senate for a vote Monday. 

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Douglas Letter, general counsel for the House, told McFadden in the hearing that Treasury has a “clear legal obligation” to turn over the documents that Democrats still want even though he’s out of office, according to Politico. “Our feeling is enough is enough. The statute is clear,” he said. 

It’s unclear if the Treasury Department under Biden will allow the House access to the returns.

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Democrats and the district attorney of New York City are also seeking his tax returns in separate cases.

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