Dow Jones Futures Fall As Deutsche Bank Woes Become Latest Focus

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Dow Jones futures fell Friday morning, along with S&P 500 futures and Nasdaq futures, as Deutsche Bank shares sold off on rising default risks.

Bank stocks already tumbled Thursday, as the market rally attempt whipsawed and diverged yet again. The Nasdaq closed solidly higher but well off its best levels while, while the Russell 2000 hit a fresh 2023 low as Moody’s Investor Service warned of wider bank contagion and economic fallout. Stocks rallied late as Treasury Secretary Janet Yellen pledged “additional actions” for bank deposits if needed.

First Republic (FRC) skidded to a record low and PacWest Bancorp (PACW) to an all-time closing low. But superregionals such as KeyCorp (KEY) and Comerica (CMA) also sold off, with even some giants like Bank of America (BAC) hitting multiyear lows.

Meritage Homes (MTH) and KBH stock flashed buy signals amid strong KB Home (KBH) earnings. Microsoft (MSFT) traded back above a buy point. Yum China (YUMC) broke out. The VanEck Semiconductor ETF (SMH) cleared a buy point, offering a way to play the chip sector with NVDA stock and many hot semis extended.

MTH stock and Nvidia (NVDA) are on IBD Leaderboard. MSFT stock is on IBD Long-Term Leaders. Meritage and KBH stock are on the IBD 50, along with several other homebuilders. Meritage Homes is Thursday’s IBD Stock Of The Day.

But investors should remain cautious. Yes, a rally attempt is underway, but it’s still a market correction. The rally attempt remains divided and volatile, with the banking sector a major negative.

Deutsche Bank Is Latest Concern

Banking fears shifted from U.S. regional banks to European giants once again Friday.

DB stock plunged 10% early Friday as the cost of insurance against a default spiked. Deutsche Bank stock skidded 6% on Thursday to a five-month low. The German giant has long been a struggling bank. Other European bank stocks retreated as well.

In the U.S., regional banks and giants such as First Republic and BAC stock fell modestly to solidly before the open.

Moody’s: Wider Bank ‘Turmoil’ A Risk

There is a rising risk that regulators “will be unable to curtail the current turmoil without longer-lasting and potentially severe repercussions within and beyond the banking sector.” That could trigger greater “financial and economic damage than we anticipated,” Moody’s Investor Service warned Thursday. Still, the credit-ratings agency still expects policymakers to “broadly succeed.”

Bank stocks and the major indexes came off afternoon lows as Treasury Secretary Yellen said in prepared remarks to a House committee that the government “would be prepared to take additional actions if warranted.”

Aside from that line, Yellen largely reiterated Wednesday’s remarks to a Senate panel, when she said officials aren’t looking to extend a “blanket” guarantee to all deposits at all banks. That comment helped trigger Wednesday’s downside market reversal. However, Yellen had previously indicated that any bank that struggles will spur further deposit guarantees.

The FDIC aims to announce the fate of SVB Financial’s Silicon Valley Bank over the weekend, Barron’s Advisor reported Thursday.

Dow Jones Futures Today

Dow Jones futures fell 1% vs. fair value. S&P 500 futures lost 0.8% and Nasdaq 100 futures declined 0.4%. Futures are off lows but suggest the S&P 500 will undercut its 200-day line at Friday’s to open.

The 10-year Treasury yield tumbled 11 basis points to 3.3%. The 2-year yield dived 17 points to 3.64%.

Crude oil futures plunged 4%.

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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Stock Market Rally

The stock market rally attempt saw big intraday gains fizzle, though the major indexes did close higher after turning mixed midafternoon.

The Dow Jones Industrial Average climbed 0.2% in Thursday’s stock market trading. The S&P 500 index rose 0.3%, with Zions Bancorp (ZION), Comerica and KEY stock the three worst performers. The Nasdaq composite climbed 1%. The small-cap Russell 2000 declined 0.8%.

U.S. crude oil prices fell 1.3% to $69.95 a barrel. Copper futures bounced 1.9%, up 7.5% during a six-session win streak.

The 10-year Treasury yield slumped 9 basis points to 3.41%. The two-year yield tumbled 17 basis points to 3.81%.

Despite Fed signals Wednesday that the central bank will hike one more time, markets see a 66% chance of a pause in May, up from 50.1% on Wednesday and 39.7% on Tuesday. Investors expect Fed rate cuts to start this summer.

ETFs

Among growth ETFs, the Innovator IBD 50 ETF (FFTY) rose 1.2%, while the Innovator IBD Breakout Opportunities ETF (BOUT) climbed 0.7%. The iShares Expanded Tech-Software Sector ETF (IGV) rallied 1.5%, with Microsoft stock a key component. The VanEck Vectors Semiconductor ETF (SMH) popped 2.7%. NVDA stock is a major SMH holding.

Reflecting more-speculative story stocks, ARK Innovation ETF (ARKK) slumped 1.5% and ARK Genomics ETF (ARKG) gained 0.7%. Coinbase (COIN) and Square-parent Block (SQ), both top-10 Ark Invest holdings, fell more than 10% on Thursday.

SPDR S&P Metals & Mining ETF (XME) edged up 0.3% and the Global X U.S. Infrastructure Development ETF (PAVE) dipped 0.3%. U.S. Global Jets ETF (JETS) descended 1%. SPDR S&P Homebuilders ETF (XHB) closed just below break-even. The Energy Select SPDR ETF (XLE) declined 1.4%. The Health Care Select Sector SPDR Fund (XLV) edged down 0.2%.

The Financial Select SPDR ETF (XLF) gave up 0.7%, setting a five-month low. BAC stock is a notable XLF holding. SPDR S&P Regional Banking ETF gave up 2.8%, hitting the worst levels since late 2020. First Republic, PACW, KEY and CMA stock are all KRE holdings.

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Market Rally Analysis

For a second straight session, the market rally attempt whipsawed off big intraday gains. On Wednesday, the major indexes reversed sharply lower. On Thursday, they closed higher, but it wasn’t the action you want to see in a market rally.

The Nasdaq was still up solidly thanks to megacap techs such as Microsoft stock, Nvidia and Meta Platforms (META). But it was an inside day, giving up more than half its 2.5% intraday bounce.

The S&P 500 bounced from its 200-day line, but hit resistance near at its 50-day. The Invesco S&P 500 Equal Weight ETF (RSP), not dominated by those megacap techs, fell 0.35%, marking a five-month intraday low.

The Dow Jones tried to reclaim the 200-day line, but slashed gains. The Russell 2000 opened strong but reversed lower as bank stocks deteriorated again.

The chip sector is still looking robust. Nvidia stock, Aehr Test Systems (AEHR) and a few others are powering higher, but are generally extended. Several others, such as Applied Materials (AMAT), are near buy areas, but aren’t really outperforming the SMH ETF.

Homebuilders are looking strong. KBH stock and Meritage rallied toward official buy points, but pared intraday gains.

YUMC stock broke out of a flat base. Yum China earnings should boom in 2023 with Covid restrictions lifted.

But breadth is narrow.

A sustained market rally is almost impossible if the banking crisis worsens. SVB Financial was an outlier in many ways, so it was a bad sign to see other California-based banks such as FRC stock and PacWest come under pressure. Far worse if superregionals such as CMA stock and KeyCorp start to buckle. BAC stock is at its worst level since 2020. Even JPMorgan Chase (IBD), among the best-capitalized banks, is testing recent 2023 lows and its 200-day line.

Ex-FDIC chief Sheila Bair told MarketWatch on Thursday that the issue of unrealized bond losses “is a risk confronting all banks,” not just regional players.

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What To Do Now

The market rally attempt is divided, volatile and news-driven. It is not a confirmed uptrend.

Investors can try to play some leaders. But while some, such as Nvidia and On Holding (ONON) have worked, many others have fizzled. Anyone buying stocks on strength in the past two days is likely sitting on at least modest losses.

So keep your exposure light, cutting losses quickly. With winners, consider taking at least partial profits quickly to make sure you end up with gains.

There’s nothing wrong with staying all or entirely in cash until there is a sustained market rally with bank headlines in the background.

Either way, investors should stay engaged and ready to act. That means being prepared with up-to-date watchlists as well as having your exit strategies in place.

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.