Dow Jones futures fell sharply Thursday morning, along with S&P 500 futures and Nasdaq futures, on news that Canada arrested the CFO of Chinese telecom gear giant Huawei. Canada's arrest, at the behest of the U.S., enraged China. Meanwhile, crude oil futures fell as Saudi Arabia proposed a smaller-than-expected production cut at Thursday's big OPEC meeting.
XInvestors can find parallels to the current choppy stock market rally from this past spring and summer. But there are key differences that aren't encouraging. Long-term support lines are acting as resistance. Stock market rallies are short-lived, while the stock market struggles to make higher highs. Apple (AAPL) and FANG stocks Facebook (FB), Amazon.com (AMZN), Netflix (NFLX) and Google parent Alphabet (GOOGL) are all in worse shape than earlier this year. Finally, economic and earnings growth look weaker going forward.
Dow Jones Futures Today
Dow Jones futures fell 1.5% vs. fair value, S&P 500 futures lost 1.3% and Nasdaq 100 futures retreated 1.6%. Remember that Dow Jones futures, Apple stock and other overnight action don't always translate into actual trading in the next regular stock market session. U.S. stock markets were closed Wednesday for a national day of mourning for former President George H.W. Bush.
Canada arrested Huawei CFO Wanzhou Meng on Dec. 1 and faces potential extradition to the U.S., America is probing the Chinese telecom giant for potential violations of Iran sanctions. The arrest could undermine U.S.-China trade talks. China could retaliate by detaining American executives, some speculate.
China's embassy in Canada demanded that the U.S. "rectify wrongdoings" and free Meng, who is also vice chairman Huawei Technologies. Meng is the daughter of Huawei founder Ren Zhengfei and a possible future leader of the company.
Huawei Technologies is a massive, global telecom equipment giant. But the U.S. has viewed it suspiciously, citing various ties to China's military. The U.S. sanctioned another big Chinese telecom gear giant, ZTE, briefly banning U.S. suppliers from working with it before Trump intervened.
Meanwhile, U.S. crude futures sank 2.5% after Saudi Arabia proposed a smaller-than-expected crude oil production cut of one million barrels per day for OPEC and allies including Russia at Thursday's OPEC meeting. Hopes for a big output reduction had lifted crude oil prices after a sharp sell-off in recent months.
Stock Market Sell-Off
The Dow Jones industrial average fell 3.1% in Tuesday's stock market trading. The S&P 500 index tumbled 3.2% and the Nasdaq composite 3.8%. Confusion and concerns about the China trade war truce, along with a partially inverted Treasury yield curve were the key catalysts for the sell-off.
Those are similar headwinds to earlier this year, when Trump tariff threats and a flattening Treasury yield curve — though with rates generally rising — were the main culprits.
Eventually, the stock market recovered over several months, but in choppy action that made investing challenging.
So, are we headed for a similar stock market slog to new highs? Keep in mind, to borrow every investment vehicle's legalese, that past performance is not a guarantee of future results. But in addition to similar headwinds and volatile market action, there are four notable differences between then and now.
1. Key Support Levels Act As Resistance
In the early 2018 stock market correction and aftermath, the 200-day moving average acted as support. The major averages hit stock market correction lows on Feb. 9, when the S&P 500 index just undercut that long-term support intraday. The S&P 500 index did test its 200-day over sessions in April, closing just below that line on one occasion. The Dow Jones tested that level several times but didn't close below that rising line until July 30. The Nasdaq composite never touched its 200-day. So the line generally acted as a support area.
Since the stock market correction kicked into gear in October, the 200-day line has acted as resistance, especially for the Nasdaq and S&P 500 index. On Tuesday, the Dow Jones and S&P 500 plunged through their 50-day and 200-day lines. The Nasdaq lost further ground.
Also, the 200-day line was rising during the early 2018 correction and recovery. It's flat to falling now.
2. Weaker, Shorter Stock Market Rallies
During the spring-summer stock market recovery, the major averages made a series of higher highs and higher lows. The lows tended to undercut the prior highs, but there was some semblance of an uptrend.
Recent stock market rallies have been short-lived, barely getting a breath before sharp selling resumes. The Nasdaq composite did set a lower low in November, though the S&P 500 and Dow have not. But if Tuesday's sell-off marks the start of renewed selling, at least in the short term, Monday would mark a lower high for the three main indexes.
3. Apple Stock, FANG Stocks Worse Off
Apple stock and the FANGs are such a big share of the stock market that their performance has a big impact on the major averages, especially Apple's.
During the late January-early February stock market correction, Apple stock initially sold off more than the S&P 500 index. But its relative strength line began to rally on Feb. 2, a week before the S&P 500 bottomed. Netflix stock barely paused during that correction, while Amazon stock also held up well. Facebook stock and Google stock were weak in February and March but then rebounded from the end of March to late July.
In the current sell-off, FANG stocks have been weak. Facebook, Google and Netflix stock have been laggards since some point in July. Amazon stock has struggled.
Apple stock fared well in October but crashed 20% in November and is down slightly this month. Apple's woes are a big reason for the Nasdaq composite hitting new lows last month. Shares are trading near seven-month lows with its RS line just above recent lows.
On Tuesday, beaten-down Facebook stock fell 2.2%. Apple stock lost 4.4%, Amazon stock 5.7%, Netflix stock 5.2% and Google stock 4.8%. All five stocks were down 1%-2.5% in Thursday's premarket.
4. Economic, Earnings Growth Outlook Weaker
Perhaps the most importance difference is the economic and corporate-profit backdrop. In early 2018, U.S. economic prospects were bright, with GDP growth topping 4% in Q2. Earnings growth surged as Trump tax cuts fueled demand and turbocharged profit margins.
Kick forward to today, and the tax-and-spending stimulus is set to wear off in 2019, while Fed rate hikes and Trump trade wars are taking their toll. Economists see U.S. GDP growth slowing to a 2% handle. Europe, China and emerging markets, already slowing in 2018, may see further deceleration next year. Corporate profit gains are expected to be much smaller, with S&P 500 revenue already flatlining in Q3.
Apple earnings growth and revenue gains have accelerated for several quarters. But shares are reeling due to a weaker holiday outlook and other signs of flagging iPhone demand. Facebook stock has many headwinds right now, but warnings of much-slower growth and flattening North America user levels are key.
IBD 50 Earnings Reports
Late Wednesday, IBD 50 discount retailer Five Below (FIVE) and cybersecurity firm Okta (OKTA) reported better-than-expected earnings and revenue. Five Below's holiday guidance was mixed though.
On Thursday night, IBD Leaderboard stocks Ulta Beauty (ULTA) and Lululemon Athletica (LULU) report quarterly results. Ulta and Lululemon are also on the IBD 50. Before the open Earnings Kroger (KR) and Chinese internet firm Momo (MOMO) released results.
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