U.S. equities still are trying to find their footing. Broad market indices have traded mostly sideways for the past few months, and have continued that trend during the first few sessions of earnings season. But as these three big stock charts show, flattish trading for the market as a whole hides significant volatility in certain sectors.
Growth stocks have tumbled. Key industrial stocks are fading among concerns about the trade war and weakening manufacturing metrics. Meanwhile, long-shunned value stocks look more attractive — and are seeing buyers.
Monday’s three big stock charts highlight those trends, with implications that could go well beyond the stocks involved.
Since the beginning of 2018, 3M (NYSE:MMM) has seen a worrisome technical pattern of lower lows and (mostly) lower highs. The fundamentals have been concerning as well. MMM stock plunged 13% in April after cutting guidance following Q1 earnings. MMM stock hasn’t recovered, and touched a three-year-low earlier this month. The combination sets up an interesting chart ahead of Q3 earnings on Thursday morning:
- MMM stock has bounced nicely into the report, gaining 8% in the last seven trading sessions. Clearly, buyers are stepping in ahead of earnings, believing that either the stock is too cheap and/or that the Q3 release will supply good news. Technically, that raises hopes that a bottom is in, given a similar bounce from modestly higher lows in August. If MMM stock can hold these levels out of earnings, support may have held around $150, and that might suggest some strength going forward.
- Fundamentally, the report looks obviously key. Confidence in MMM stock is shaken. Other industrials like Caterpillar (NYSE:CAT), Honeywell (NYSE:HON) and even General Electric (NYSE:GE) reflect concerns about broader demand. If 3M can deliver despite headwinds in China and in automotive, that might inspire confidence that its industrial peers can do the same. With valuations across the sector much more reasonable, a strong report from 3M could catalyze buying in those stocks. At the moment, investors seem to be betting on just such a report.
- On both fronts, however, a decline coming out of Thursday’s report looks close to disastrous. Technically, the downtrend holds. Fundamentally, MMM stock doesn’t look cheap enough at 16x 2020 EPS estimates — particularly given those estimates are likely to come down. Qualitatively, management credibility is damaged. This is a huge report for 3M on all fronts.
Bank of America (BAC)
For Bank of America (NYSE:BAC), the story is quite different. BofA has already reported earnings. As with its fellow big banks, the news looked good. Meanwhile, BAC stock is one of our three big stock charts because it’s challenging resistance, not testing support:
- As seen in the chart above, BAC stock has made a double top right at $31. Another effort to re-take those levels suggests a potential inflection point technically. A move through that resistance could lead to a breakout. And with rival JPMorgan Chase (NYSE:JPM) facing a roughly similar setup, as we detailed last week, the entire sector could follow.
- Fundamentally, BAC stock is cheap enough to move higher, at a little over 11x 2019 consensus EPS estimates. So are other big bank stocks. Yet the group has been stuck for roughly 18 months now. Cheap hasn’t been good enough yet, given worries about interest rates and a potential recession. A breakout for BAC stock could signal that investors are willing to take on cyclical risk — which, too, could read across to the broader financial industry, as well as sectors like construction and even retail.
- The question is, what happens if resistance holds again? BAC stock is cheap, but it’s been cheap for a while, and for some good reasons. After strong earnings, a dip back below $30 might suggest that Bank of America stock is going to stay cheap for some time.
Workday (NASDAQ:WDAY) is one of Monday’s big stock charts — but any number of similar SaaS (software-as-a-service) names could fit as well. High-flying growth stocks have crashed across the board. WDAY stock is down by over 30%. Data play Alteryx (NYSE:AYX) is off 35%. The list of decliners goes on: CrowdStrike (NASDAQ:CRWD), Zscaler (NASDAQ:ZS), Slack Technologies (NYSE:WORK), Zoom Video Communications (NASDAQ:ZM), and others.
The immediate question for WDAY stock, and the group, is where and when the bottom arrives. So far, there has been little evidence, though there was some modest good news in Friday’s sell-off:
- WDAY stock did bounce on Friday afternoon. The stock touched a 2019 low around $151, but rose roughly 2% in the second half of the session. A rally in the stock was undercut by an analyst downgrade last week after an analyst event suggested growth was set to decelerate. The buying on late Friday suggests some investors see value amid the 30%-plus sell-off.
- SHOP), and other fallen growth angels, has touched a seven month low. The index isn’t a perfect comparable for SaaS names, but it does highlight broader weakness. The Invesco Dynamic Software ETF (NYSEARCA:PSJ) is down 12% in less than three months, and its chart suggests a potential plunge if a bottom isn’t formed. That said, the group as a whole looks weak. The BVP NASDAQ Emerging Cloud Index, which includes WDAY, ZS, Shopify (NYSE:
- SaaS stocks typically have looked overvalued for much of this bull market and have risen anyway. The end of that trade could mean a shift to value, if the likes of BAC and MMM can rally. Conversely, it could mean that valuations again matter — for the entire market, not just high-growth names.
As of this writing, Vince Martin has no positions in any securities mentioned.