Yellen default warning, rising bond yields slam stocks

Dow Jones futures rose slightly Tuesday night, along with S&P 500 futures and Nasdaq futures. The stock market rally suffered sharp losses amid rising government bond yields as Treasury Secretary Janet Yellen warned of impending government bankruptcy next month. Micron gains took center stage overnight.




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The S&P 500 and Nasdaq composite fell in heavy volume below their 50-day moving average, indicating a change in character for the stock market rally.

Leading stocks looked even worse, with the Innovator IBD 50 ETF (FFTY) on track for its worst weekly loss since the coronavirus crash.

Tech Titans, growth leaders dive in

Tech titans like Microsoft (MSFT), Google parent Alphabet (GOOGL), while Apple (AAPL) facebook (FB) and Amazon.com undercut or set recent lows, along with Nvidia (NVDA), ASML (ASML), Applied materials (AMAT) and Service now (NOW).

cloudflare (NET), which tumbled to its 50-day line on Monday, tumbled 7.9% on Tuesday, finally breaking the 50-day line. NET shares are down 17% in the past four sessions as many software names have come under severe pressure. Stocks of medical products, from biotech companies to test companies to system makers, continued to struggle. Even InMode (INMD), which brushed off recent market weakness, fell 13%.

Energy stocks have performed well, holding on to recent gains even as crude oil pulled back from multi-year highs to close slightly lower. Financials also performed well, with rising government bond yields providing support.

ASML, Microsoft, Google, ServiceNow and Nvidia are all up IBD standings. Microsoft, ServiceNow, ASML and Google stocks are all IBD long-term leaders, with several others having tough sessions as well.

The video embedded in the article is marked with Microsoft, ASML, and NET shares.


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Janet Yellen American Standard Warning

Treasury Secretary Yellen told the Senate Banking Committee that a U.S. default is likely without a debt limit hike by Oct. 18, giving a specific date for the first time. Meanwhile, after September 30, the government faces a partial shutdown with no new funding. Republicans in the Senate blocked an increase in the debt cap and short-term funding late Monday, saying they want Democrats to raise the debt cap themselves.

All of this comes as House Speaker Nancy Pelosi schedules a vote Thursday on the bipartisan infrastructure bill. It’s unclear whether a small number of GOP supporters will offset the departure of left-wing Democrats who want the infrastructure bill tied to a major tax and spending reconciliation package that’s far from done.

Meanwhile, Fed chief Jerome Powell, who testified as Treasury Secretary Yellen at the same Senate Banking hearing, said inflation would remain higher than previously expected.

Going forward, the Federal Reserve and the European Central Bank aim to scale back asset purchases, although actual rate hikes are likely more than a year away.

All of this helps to drive up government bond yields. Ten-year government bond yields rose by five basis points to 1.53%. Intraday, the 10-year yield reached almost 1.57%, the highest since June.

Micron Income

Micron technology (MU) reported better-than-expected results late Tuesday. But the memory chip giant steered sharply downward.

Micron stock sank 4% overnight. Shares fell 2.8% to 73.10 Tuesday, back below the 50-day mark. MU shares have been in a downward trend since mid-April.

Micron’s outlook isn’t a good sign for the semi-finals or the market rally in general, but it’s especially important for memory-exposed chip equipment manufacturers such as Applied Materials and Lamb Research (LRCX). AMAT shares and Lam Research moved lower in extended trading. AMAT shares fell 6.9% Tuesday, back below the 50-day line. LRCX shares were up 5%, closing below the 50-day and 200-day lines.

Dow Jones Futures Today

Dow Jones futures rose 0.2% from fair value. S&P 500 futures climbed 0.2%. Nasdaq 100 futures were up 0.1%.

Crude oil prices, which fell slightly on Tuesday, fell overnight after the American Petroleum Institute reported a surprising increase in US inventories last week. The Energy Information Administration will release its official figures for the supply and production of crude oil and gasoline on Wednesday morning.

Keep in mind that an overnight action in Dow futures and elsewhere does not necessarily lead to actual trading in the next regular trading session.


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Stock Rally Tuesday

The stock market rally started weak and closed weaker, in a broad sell-off.

The Dow Jones Industrial Average fell 1.6% in Tuesday’s trading. The S&P 500 index fell 2%. The Nasdaq composite fell 2.8%, its worst loss since March. The small cap Russell 2000 lost 2.25%.

Apple shares fell 2.4%, not quite below last week’s intraday low, but posted the worst close since July 2. That was when AAPL shares broke from a cup base.

Microsoft shares fell 3.6% and Google shares 3.7%, both breaking below the 50-day lines and last week’s lows.

FB shares, which undercut its 50-day line on Sept. 20 and continued to retreat, fell 3.7% Tuesday, below last week’s lows.

AMZN shares, still trying to recover from its disappointing second-quarter earnings report, fell 2.6%, back to the 200-day line.

NVDA stock undercut its 50-day line and last week’s low, tumbling ASML stock, which was a big-cap semiconductor superstar in 2021, fell 6.6%. It was ASML’s first decisive 50-day undercut since March.

NOW stock fell 5.7%, closing just below the 50-day line for the first time since early June.

ETFs

One of the best ETFs, the Innovator IBD 50 ETF (FFTY) fell 5.4%, while the Innovator IBD Breakout Opportunities ETF (BOLT) slipped 3.9%.

The iShares Expanded Tech Software Sector ETF (IGV) fell 3.6%, slipping below the 50-day mark to its worst level since the August 19 rebound. MSFT stock and ServiceNow are major IGV components while NET stock is also a holding company. The VanEck Vectors Semiconductor ETF (SMH) fell 4%. Nvidia stock and chip gear makers ASML, AMAT, and LRCX are all noteworthy components.

Outside of growth, sector ETFs were generally lower, but losses were smaller.

SPDR S&P Metals & Mining ETF (XME) fell 0.5% and Global X US Infrastructure Development ETF (PAVE) ceded 1.5%. US Global Jets ETF (JETS) fell 1.3%. SPDR S&P Homebuilders ETF (XHB) gave up 2.5%. The Energy Select SPDR ETF (XLE) rose 0.3% and the Financial Select SPDR ETF (XLF) slipped 1.65%.

Due to more speculative story stocks, ARK Innovation ETF (ARKK) gave up 3.8% and ARK Genomics ETF (ARKG) 4.2%. ARKK is at its lowest level since early June, while ARKG is approaching its May low.


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Market rally analysis

The stock market rally seemed to revive late last week, but is now showing real damage to major indices and leading stocks. The S&P 500, which had found support on its 50-day line for several months, now appears to be resisting at its key level. The Nasdaq didn’t quite break last week’s lows – the big-cap Nasdaq 100 did – but ended near session lows with the worst close since August 19.

Despite their energy and financial components, the Dow Jones and small-cap Russell 2000 still fell sharply. The Dow Jones is moving away from its 50-day line, while the 2000 Russell closed a fraction below that key level.

FFTY has not fallen below the 50-day mark but is down 7.6% so far this week. That’s right, it’s only Tuesday and FFTY is suffering its worst weekly loss since the March 2020 coronavirus crash. From high-flyers to institutional stalwarts, growth names are being hammered. And even those that had found significant support, such as NET stocks, ASML, Microsoft, and Google, aren’t doing so now.

Energy, fertilizer, financial and travel stocks performed relatively well. We may be in the midst of a sector rotation of growth stocks, although there is a big difference between rotation in an overall uptrend versus rotation in a market pullback. A decline in energy prices and government bond yields would also come as no surprise, if only in the short term.


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What to do now

If you own stocks that work, especially in energy, banking, or other sectors that look healthy, you probably don’t need to take any action. But with growth stocks and with your portfolio in general, you need to take a defensive approach. Recent outbreaks or 50 day line rebounds fail. Big winners cut profits. It’s time to scale back your exposure and wait for a healthy market rally to return.

It is possible that the stock market rally will recover very quickly, with major indices moving above the 50-day line. Still, in that scenario, investors should gradually scale back.

But for now, focus on defense. But you should always be prepared to go on the attack. Rework your watchlists.

Read The Big Picture every day to stay up to date on market direction and leading stocks and sectors.

Follow Ed Carson on Twitter at @IBD_ECarson for stock updates and more.

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