Dow Jones futures fell solidly Thursday morning, along with S&P 500 futures and Nasdaq futures. The stock market rally closed with slim gains on Wednesday, continuing the recent trend of minimal moves on the major indexes.
Wednesday was all about AMC Entertainment (AMC) and other meme stocks such as GameStop (GME), BlackBerry (BB), Bed Bath & Beyond (BBBY) and Koss Corp. (KOSS). AMC stock nearly doubled. GME stock, BB stock, BBBY stock and Koss all were up sharply.
AMC stock reversed lower Thursday morning as the movie theater chain announced yet another share sale. Other meme stocks also were active.
Meanwhile, Tesla (TSLA) tested key support Wednesday on a variety of negative headlines, while Digital Turbine (APPS) reversed lower from key resistance following earnings. Both highlight the risks of buying old winners when they are in the early stages of a possible rebound from a sharp sell-off.
Tesla stock fell early Thursday, suggesting another move below its 200-day line.
Buying meme stocks or former leaders trying to recover can be seductive, but it’s not the path to long-term stock market success.
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NetApp (NTAP), Splunk (SPLK), Smartsheet (SMAR), Elastic (ESTC) and C3.ai (AI) reported earnings after the close.
NetApp, Smartsheet and Elastic topped estimates. Splunk and C3.ai beat on revenue but losses were wider than expected.
NTAP stock edged lower overnight. Elastic jumped and Smartsheet rose in extended trade while Splunk fell and AI stock tumbled. AI stock had rebounded somewhat in the past few weeks after crashing in the prior three months.
Dow Jones Futures Today
Dow Jones futures fell 0.7% vs. fair value. S&P 500 futures sank 0.8% and Nasdaq 100 futures retreated 1.05%. That suggests the Nasdaq will open at or below its 50-day moving average.
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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Coronavirus cases worldwide reached 172.49 million. Covid-19 deaths topped 3.70 million.
Coronavirus cases in the U.S. have hit 34.15 million, with deaths above 610,000.
Stock Market Rally
The stock market rally had a quiet session, with the major indexes never moving up or down much intraday.
The Dow Jones Industrial Average rose about 0.1% in Wednesday’s stock market trading. The S&P 500 index and Nasdaq composite edged up 0.1%. The small-cap Russell 2000 also climbed 0.1% after Tuesday’s strong 1.2% advance.
Among the best ETFs, the Innovator IBD 50 ETF (FFTY) dipped 0.1%, while the Innovator IBD Breakout Opportunities ETF (BOUT) rose 0.8%. The iShares Expanded Tech-Software Sector ETF (IGV) edged up about 0.1%. The VanEck Vectors Semiconductor ETF (SMH) gained 0.6%.
SPDR S&P Metals & Mining ETF (XME) retreated 1.5% and Global X U.S. Infrastructure Development ETF (PAVE) sank 1.2%. U.S. Global Jets ETF (JETS) advanced 0.3%. SPDR S&P Homebuilders ETF (XHB) sank 1.4%.
Reflecting more-speculative story stocks, ARK Innovation ETF (ARKK) was just above break-even and ARK Genomics ETF (ARKG) dipped 0.3%. Both are still below their 200-day lines. Tesla stock is the top holding across ARK Invest ETFs.
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AMC stock skyrocketed 95% to 62.55 on Wednesday, rising as high as 72.62 intraday. Over 700 million shares traded hands, along with several million AMC stock option contracts. Wednesday’s catalyst, if any, was AMC Entertainment announcing a new AMC Investor Connect, leaning into the meme stock frenzy. Investors who sign up can get a free popcorn at an AMC theater.
AMC stock popped 23% on Tuesday and exploded for a 116% gain last week.
An investor could have bought AMC stock strictly — on technicals, not fundamentals — on May 25, as it broke past a handle buy point of 14.77. But that clearly does not apply.
At Wednesday’s close, AMC stock was 175% above its 10-day line, extremely extended, suggesting that a near-term pullback is highly likely. Then again, shares closed 310% above their 10-day on Jan. 27, at the end of AMC’s first Reddit run this year.
Before the open, AMC filed to sell 11.55 million shares, taking advantage of the high price. On Tuesday, AMC sold 8.5 million shares to Mudrick Capital, which sold the position hours later.
In the SEC filing, AMC Entertainment warned investors of the extremely high risks of buying AMC stock, noting that share price is disconnected from the “underlying business.”
“We believe that the recent volatility and our current market prices reflect market and trading dynamics unrelated to our underlying business, or macro or industry fundamentals, and we do not know how long these dynamics will last. Under the circumstances, we caution you against investing in our Class A common stock, unless you are prepared to incur the risk of losing all or a substantial portion of your investment.”
AMC stock fell 9% in the premarket after trading up more than 20% earlier.
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GME Stock, BBBY Stock, Other Meme Plays
GME stock leapt 13% to 282.24. GameStop stock rose 12% on Tuesday.
BlackBerry stock ran up 32% to 15.25. That’s after a 15% BB stock gain on Tuesday.
BBBY stock rocketed 62% to 44.19. Bed Bath & Beyond actually dipped 2.6% on Tuesday. Arguably Wednesday was the “breakout” day for BBBY stock, strictly on technicals. Wednesday’s catalyst for BBBY stock was the AMC-led meme rally. But the ultimate reason is that 27% of its float is short.
Koss stock vaulted 69% to 40.72. Koss gained 4.7% on Tuesday.
Early Thursday, BB stock jumped more than 10%. GME stock fell while Koss and BBBY stock tumbled.
Meme Stock Risks
While some lucky traders have made fortunes buying AMC stock and other meme plays over the past few months, the risks are also huge in the short and long run. In the short run, it’s easy to be down 20%, 30% or more in just minutes. Longer term, GME stock and other Reddit favorites seem likely to fall massively, reflecting the actual businesses’ often-poor prospects.
AMC Entertainment and other theater operators are seeing a big boost in moviegoers, but it’s still losing a lot of money. Even before the pandemic, AMC’s business was struggling, with ever-improving TVs and streaming options posing an ever-greater threat to cinemas.
GameStop is a mall-based video game retailer with malls in long-term decline and video games going digital. While there’s a goal of shifting to digital, it’s not clear what GameStop’s particular edge would be as a digital middleman between video game publishers and consoles.
At least Tesla and many big 2020 winners like Digital Turbine have real growth and at least a plausible “story” for the future.
Tesla stock fell 3% to 605.12 on Wednesday, though it closed above its 200-day line after testing that long-term support. Still above the May 19 low of 546.98, TSLA stock is far below the record 900.40 set on Jan. 25.
Among the negative news, Tesla CEO Elon Musk tweeted once again that chip shortages are having a major impact on operations. Also, Tesla recalled some Model 3 and Y vehicles over possible loose bolts. SEC documents show that the watchdog agency believed Tesla isn’t reviewing Musk’s tweets, violating a settlement, though it doesn’t appear that Musk or his company will face any consequences.
Early Thursday, Tesla announced two more recalls related to fasteners that could affect seat belts.
Tesla stock fell more than 2% before the open, signaling a move below its 200-day line and the 600 level. APPS stock also signaled further losses.
Digital Turbine Stock
APPS stock initially rose toward its 50-day line, but then tumbled 4% to 65.03%. Digital Turbine earnings growth accelerated for a fifth straight quarter, to 400%. Sales soared 142%, just snapping a four-quarter streak of faster gains.
Both TSLA stock and Digital Turbine have rallied off May lows following major sell-offs. But they are still both below their 50-day lines and much closer to their recent lows than their all-time highs, leaving a lot of overhead resistance. Buying now can offer cheaper prices, but the risks are high that these other names will weaken again and break to fresh lows.
The relative strength line for Tesla stock is just above its worst levels since November, reflecting Tesla stock’s underperformance vs. the S&P 500 index. The RS line for APPS stock also is just above recent lows.
It’s better to wait for stocks to build the right side of bases and clear proper buy points than try to guess the bottom. Even if Tesla and APPS stock do rebound, they’ll be forming very deep bases, which are more failure prone.
Market Rally Analysis
On the surface, the stock market rally had another quiet session, with the major indexes closing little changed. But unlike Tuesday, the Russell 2000 did not have a strong day. When the small-cap index is up, risk seems to be “on” and leading stocks tend to do well.
Energy stocks kept running. But for the most part, leading stocks were decidedly mixed. Celsius Holdings (CELH) blasted out of a base and Nvidia (NVDA) extended its recent breakout while steel slumped.
Don’t be lulled into think this flat action will continue indefinitely. The Dow Jones and S&P 500 could easily hit new highs with one strong day. The Nasdaq could easily sink below its 50-day line in a single session. Either move would likely have significant impacts on leading stocks, especially recent breakouts.
What To Do
If you had one day to double your salary, you might march into your boss’ office and demand a huge pay hike, despite the high risk of ending up with no job.
Likewise, if you had one day to try to double your money in the stock market, then buying a meme stock like AMC might be your best hope. If you were trying to find the cheapest price for a former winner, then Tesla stock might be a way to go.
But in the long run, investors should focus on stocks with strong fundamentals breaking out of bullish patterns with buy points at or near highs. Buying the right stocks at the right time boosts your chances of winning, and winning big. It also gives you strong signals for when a stock is not working, so you can cut losses short.
This strategy is the way to maximize your odds of success over time.
The current market environment is offering buying opportunities for investors. But while this is a confirmed uptrend, it’s also a market rally under pressure. Sector rotation adds to the difficulty. So while investors should have added exposure over the past couple of weeks, it’s not a time to be overly aggressive.
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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