Dow futures drop over 350 points to start the week, reopening stocks lead the slide

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U.S. stock index futures fell on Monday on concern a rebound in Covid-19 cases would slow global economic growth.

Stocks that would most directly benefit from a continuing swift reopening of the economy led the losses in premarket trading with shares of Royal Caribbean and United Airlines falling more than 2%. The 10-year Treasury yield fell back to 1.26%, near 5-month lows amid concerns about a possible slowing in the economy.

Futures contracts tied to the Dow Jones Industrial Average dropped 351 points, or 1%. S&P 500 futures fell 0.7%. Nasdaq-100 futures shed 0.4%.

Covid cases have rebounded in the U.S. this month with the delta variant spreading among the unvaccinated. The U.S. is averaging nearly 30,000 new cases a day in the last 7-days ending Friday, up from a 7-day average of around 11,000 cases a day a month ago, according to CDC data. Cases were already flaring up around the world because of the delta variant.

Along with shares of cruise lines and airlines, key stocks linked to the global economy pulled back in premarket trading. Caterpillar, Boeing and General Motors all lost about 2%.

“The market appears ready to take on a more defensive character as we experience a meaningful deceleration in earnings and economic growth,” wrote Mike Wilson, Morgan Stanley’s chief U.S. equity strategist, in a note Monday. “Market breadth has been deteriorating for months and is just another confirmation of the mid-cycle transition, in our view. It usually ends with a material (10-20%) index level correction.”

Wilson is advising clients to buy staples such as Mondelez International to weather the decline.

Oil prices fell on fears of slowing growth and as OPEC+ agreed to begin phasing out production cuts. Energy stocks were among the worst performers in premarket trading with ConocoPhillips off by more than 3%. Exxon Mobil lost 2%. WTI crude shed 2% to about $70.02 a barrel.

A busy week of earnings is on deck, with nine Dow components set to report and 76 S&P companies will provide quarterly updates. United Airlines and American Airlines will report, as will social media companies Snap and Twitter. CSX, Johnson & Johnson, Coca-Cola, Honeywell, IBM, Intel and Netflix are also on the docket.

“We’ve been in this trading range…this rotational market — value to growth, growth to value,” said Stephanie Link, chief investment strategist and portfolio manager at Hightower, on CNBC’s “Squawk Box” Monday. “I think we’re kind of in this pattern until we can hear from companies.”

The largest banks kicked off earnings season last week, and analysts at BMO noted that ahead of the start to earnings season 66 companies in the S&P 500 issued positive earnings guidance for the quarter, which is the largest since at least 2006.

“Q2 earnings season is here and another stellar reporting period is expected for US stocks with the S&P 500 y/y EPS growth rate currently sitting at 65.5%, which would mark the strongest clip since Q4 ‘09,” the firm said in a recent note to clients.

The Dow and S&P fell 0.52% and 0.97% last week, respectively. The Nasdaq Composite, meanwhile, was the relative underperformer, dropping 1.87%, to post its worst week since May. It was the major averages first negative week in four.

Inflation fears weighed on stocks last week, with a U.S. consumer sentiment index from the University of Michigan released on Friday showing that consumers believe prices will jump 4.8% over the next year. This is the steepest climb since August 2008. Earlier in the week, the June Consumer Price Index showed that inflation jumped 5.4% year-over-year, spooking investors.

Dow futures slump over 300 points on reopening concerns

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U.S. stock futures slumped on Monday morning, with reopening concerns triggered by new cases at the Olympic village ahead of the opening ceremony, and new restrictions imposed on travel to France by the U.K., which separately reduced its coronavirus rules for England. Futures on the Dow Jones Industrial Average ymoo lost more than 300 points, and the S&P 500 ES00, -0.71% and Nasdaq 100 NQ00, -0.31% contracts also were down. The Nikkei 225 dropped 1.3% in Tokyo, and the Stoxx Europe 600 SXXP, -1.82% slumped 1.8% in mid-morning trade.

Dow Jones Futures Fall: Indexes Weaken, But Stock Market Reality Worse; Tesla FSD, OPEC+ Deal, Zoom Video In Focus

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Dow Jones futures and S&P 500 futures fell solidly Monday morning, while Nasdaq futures declined modestly, amid growing concerns about the Delta coronavirus variant. Crude oil futures retreated following Sunday’s OPEC+ production deal.

Zoom Video Communications (ZM) late Sunday agreed to buy customer contact software maker Five9 (FIVN) for $14.7 billion. Zoom Video will pay 0.5533 share for each Five9 share, equal to $200.28 as of Friday’s close. That’s a 13% premium to FIVN stock’s Friday close of 177.60. ZM stock fell 2% before Monday’s open while FIVN climbed 8%.

Tesla (TSLA) over the weekend launched a subscription option for its “Full Self-Driving” driver assistance program as an alternative to paying a big fee upfront.

The stock market rally showed further weakness late last week, with Apple (AAPL) and other megacaps no longer providing cover. The major indexes are starting to pull back, especially the Nasdaq. But other indicators are sending more-negative signals, from declining market breadth to leading stocks coming under pressure.

Energy stocks ran out of gas, with Callon Petroleum (CPE) flashing multiple major sell signals as it plunged. Roku (ROKU) and Nvidia (NVDA) sold off, undercutting key short-term averages. ASML (ASML) reversed from record highs ahead of earnings this week. Finally, Tesla stock fell back toward long-term support as recovering former leaders continue July retreats.

Tesla stock, Nvidia and ASML are on IBD Leaderboard, while Roku stock is on the Leaderboard watchlist. ASML stock is on IBD Long-Term Leaders. Nvidia stock and ASML are on the IBD 50. CPE stock was Friday’s IBD Stock Of The Day because of its sell signals.

OPEC+ Production Deal

OPEC and key allies such as Russia agreed on an OPEC+ production deal to increase output by up to 400,000 a month starting in August. The aim is to phase out all pandemic-era production cuts by September 2022.

The United Arab Emirates will get a higher production baseline, starting in May. So will Iraq, Kuwait, Saudi Arabia and Russia.

Earlier this month, the UAE blocked a deal, demanding higher output for itself. Last week, Saudi Arabia and the United Arab Emirates agreed on a compromise. OPEC ministers from several countries, include Saudi Arabia and UAE, met online Saturday.

Crude oil futures fell nearly 3% Monday morning. Oil prices retreated last week, while many energy stocks sold off hard.

An OPEC+ production deal will boost crude oil supply. But an agreement also heads off the risk that the cartel would splinter, with various members ramping up output sharply.

Dow Jones Futures Today

Dow Jones futures fell 1.1% vs. fair value. S&P 500 futures lost 0.8% and Nasdaq 100 futures retreated 0.4%.

Investors fear rising coronavirus cases and related restrictions will take their toll on economic growth. Travel-related stocks, under pressure for weeks, were losers again early Monday. So were energy and other commodity plays.

The 10-year Treasury yield fell 4 basis points to 1.26%, right around five-month lows.

Copper futures declined more than 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 191.30 million. Covid-19 deaths topped 4.10 million.

Coronavirus cases in the U.S. have hit 34.96 million, with deaths above 624,000.

New coronavirus cases have picked up in the U.S. and worldwide. Hospitalizations are starting to pick up in the U.S., but almost entirely among the unvaccinated.

Stock Market Rally Last Week

Stock market rally woes expanded and became more obvious as the week wore on.

The Dow Jones Industrial Average fell 0.5% in last week’s stock market trading. The S&P 500 index sank 1%. The Nasdaq composite slumped 1.9%, though the Nasdaq 100 only gave up 0.9%. The small-cap Russell 2000 tumbled 5.05%.

Apple stock rose 1% last week, the seventh straight weekly gain, even with Friday’s 1.4% retreat.

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Top ETFs

Growth and sector ETFs showed continued weakness.

Among the best ETFs, the Innovator IBD 50 ETF (FFTY) slumped 4%, while the Innovator IBD Breakout Opportunities ETF (BOUT) gave up 2%. The iShares Expanded Tech-Software Sector ETF (IGV) retreated 2.5%, even with major component Microsoft (MSFT) rising for yet another week. The VanEck Vectors Semiconductor ETF (SMH) slumped nearly 4% to below its 50-day line, reversing painfully from Wednesday’s all-time high. Nvidia and ASML stock are big SMH holdings.

SPDR S&P Metals & Mining ETF (XME) tumbled 6.6% to the lowest point since the end of April. Global X U.S. Infrastructure Development ETF (PAVE) sank 2.5%. U.S. Global Jets ETF (JETS) descended 6.5%, continuing a long slide. SPDR S&P Homebuilders ETF (XHB) retreated 3.1%. The Energy Select SPDR ETF (XLE) plunged 7.8% and the Financial Select SPDR ETF (XLF) dipped 1.6%.

Reflecting more-speculative story stocks, ARK Innovation ETF (ARKK) skidded 7.2% last week and ARK Genomics ETF (ARKG) plunged 7.8%. ARKK fell through its 200-day moving average but held its 50-day line. ARKG slammed below levels. Tesla stock is the largest holding across ARK Invest’s ETFs.

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Tesla FSD Subscriptions

Tesla is now offering drivers an FSD subscription, charging $199 a month instead of a flat $10,000 fee. That could open a big, steady revenue stream for the EV giant.

Despite the Full Self-Driving name, FSD does not offer full self-driving. It is a Level 2 driver-assist system requiring a human driver to be alert and ready to take over the wheel at any moment.

FSD subscriptions, long promised, come less than a week after Tesla released its FSD Beta V9, its latest test version of its FSD software, now only relying on vision. A select group of Tesla drivers are using FSD Beta on public roads. A slew of videos show that FSD Beta still requires substantial human interventions.

Tesla CEO Elon Musk, who had touted Beta V9 as being a huge advance, this past week said big improvements may come in the next version, or the next. Over the weekend, Musk said the Smart Summon feature, which he’s touted for years and used to justify some FSD price hikes, is mostly a “fun trick.”

Meanwhile, several other companies are testing L4 systems, sometimes without human drivers at all, including Google-owned Waymo, Argo, controlled by Ford (F) and Volkswagen (VWAGY), Amazon-owned Zoox and Cruise, majority owned by General Motors (GM).

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Tesla Stock

Tesla stock started last week strong, rising 4.4% on Monday and moving Tuesday morning just below an aggressive 700.10 entry. But shares reversed lower, and kept sliding. For the week, TSLA stock gave up 1.9% to 644.22.

On the plus side, Tesla stock is holding just above its 200-day and 50-day lines. Compared to ARKK, many EV rivals or highly valued growth generally, Tesla stock hasn’t fallen too hard. Then again, the EV leader didn’t rally as much as many similar stocks from mid-May to late June.

The relative strength line for TSLA stock is not far above early June’s nine-month low.

Shares edged lower Monday morning.

Tesla earnings are due July 26.

Callon Petroleum Stock

CPE stock plunged nearly 10% on Friday and 24% for the week. The shale oil producer round-tripped a 43% gain and then some. Callon Petroleum also fell decisively below the 10-week line for the first time since the start of its big run in late 2020. Both are very strong sell signals. Investors who bought CPE stock out of the last base should have taken at least partial profits by the time it undercut its 21-day line. Even long-term investors might have wanted to cut Callon stock loose after last week.

As the XLE ETF showed, energy stocks tumbled this week as oil prices pulled back from multi-year highs. CPE stock and other energy stocks have sold off far more than oil prices. Then again, they ran up far more than oil prices.

Nvidia Stock

Nvidia stock tumbled 9.8% last week, falling significantly below its 21-day exponential moving average and starting to approach its 50-day/10-week. The chipmaker has been one of the biggest leaders since late May.

Investors who bought between late May and early June might have taken some profits at the 21-day line or even earlier. Recent investors may want to sell out if Nvidia stock decisively breaks the 10-week line. Long-term holders have earned the right to hold NVDA stock longer if they wish.

ASML Stock

ASML stock hit a record high on Wednesday, like the SMH ETF, but closed off highs. Shares of the Dutch chip-equipment maker then fell solidly on Thursday and Friday. ASML stock edged down just 0.6%, but closed near the low of its weekly range.

ASML earnings are on tap Wednesday. That report, along with laggard Intel (INTC) on Thursday, will be key for the semiconductor sector.

Roku Stock

Roku stock fell 7.3% to 399.99 last week, after initially flashing an aggressive entry on Monday. Shares fell below their 21-day, where they found support on July 8, during a short-lived market retreat. Investors who bought as it bounced on July 8 are now sitting on losses of 5% or more.

Roku stock is holding, for now, above an early entry or double-bottom buy point at 397.79. The official buy point is 463.09, from a handle entry, according to MarketSmith analysis.

Market Rally Analysis

The Nasdaq composite fell below its 21-day line on Friday, the first clear sign of trouble on the major indexes. The Dow Jones and S&P 500 are approaching their 21-day averages. Apple stock and tech megacaps had masked weakness, but even they were starting to come back by the end of the week.

Meanwhile, the Russell 2000 has plunged below its 50-day line to a one-month low. Sector and growth ETFs showed similar weakness.

Stock market rally woes started to become obvious mid-week and especially Thursday and Friday. On Wednesday, Upwork (UPWK) and new IPO Figs (FIGS) plunged. Other breakouts and buying opportunities faltered, while big winners such as Nvidia stock and Callon Petroleum began selling off.

But the market rally has been struggling all month. The advance/decline line has been deteriorating for weeks. New lows are easily beating new highs on the Nasdaq, despite it being near all-time levels.

Ideally, Apple stock, Microsoft and a few extended megacaps would slow down for a few weeks while market breadth returns and breakouts work again. But investors should work on their watchlists, not their wish lists.

While that seems unlikely as of Monday’s premarket, don’t get excited if Dow Jones futures point to a strong open, or even if the major indexes rise solidly Monday morning. The Nasdaq reversed lower three days last week. What matters is how the stock market closes. That means not only the major indexes, but leading stocks and improving breadth as well.

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What To Do Now

Investors have to be more defensive, hopefully slashing exposure over the past week or two. Get rid of losers and at least slash positions with modest gains that are starting to fade away. If stocks are falling back from solid gains, take at least partial profits. If you have stocks that are still doing well, you can hold on, but you still might want to sell some shares into strength. That can make it easier to hold a core position as, say, Nvidia stock, falls back toward the 50-day line.

This is not a good time to be making buys. There aren’t many good setups … and lately stocks setting up have been setups for too-eager investors. New buys aren’t working, which isn’t surprising with leaders and most of the market in retreat.

If you feel the need to make a mental health buy, make it a small position and have your exit strategy in hand.

It’s probably a better idea to wait for the market to improve before adding exposure. That could happen quickly: Many leading stocks are forming handles or finding support at moving averages, including Roku stock. But the market rally hasn’t given any indication that it’s ready to revive with broader participation.

Meanwhile, earnings season is heating up, another wild card for a shaky market. Make sure you know earnings dates for your various holdings.

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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