After a 1% gain on Tuesday, U.S. equity markets took a breather on Wednesday. The S&P 500 declined 0.2% — which is somewhat of a surprise. Given strong earnings from JPMorgan Chase (NYSE:JPM) on Tuesday and Bank of America (NYSE:BAC) yesterday, investors might see a fundamental setup for broad market gains.
But that didn’t play out on Wednesday and hasn’t for some time, as U.S. stocks remain unable to retake past highs. The hope is that earnings season will change that. A nice after-hours gain for Netflix (NASDAQ:NFLX), following solid big bank reports, suggests that the earnings calendar is off to a solid start.
Of course, most major companies have yet to report, so the market’s caution at the moment might make some sense. Investors trying to gauge whether that caution is justified should look toward these three big stock charts. None of the stocks involved actually are a part of this earnings season — but their movements could signal the direction of stocks that are.
Deere & Company (DE)
Farm equipment manufacturer Deere & Company (NYSE:DE) is just one of a number of cyclical companies testing all-time highs. DE stock is trying to break through resistance that has held multiple times around $170. A breakout would read across to the rest of the market for several reasons:
- Again, DE stock isn’t alone. Homebuilder D.R. Horton (NYSE:DHI) has moved straight up for basically all of this year, and already has touched all-time highs. Rival Lennar (NYSE:LEN) is trying to do the same. This matters for the market as a whole. It was cyclical stocks that were the canary in the coal mine ahead of last year’s Q4 sell-off. Strength in cyclicals this time around, combined with solid bank earnings, suggests a potential reversal to gains in this year’s fourth quarter.
- The strength in DE stock looks like good news for fellow equipment manufacturer Caterpillar (NYSE:CAT). Deere and Caterpillar obviously have different operating models and end markets. The two stocks don’t always trade together. But CAT stock is desperately looking for good news after being stuck in a downtrend for over 18 months. A breakout in DE stock could suggest that investors will take a look at CAT stock as well.
- At 15x forward earnings, DE stock isn’t expensive. Investors hoping that the bull market has another leg up can look to the stocks, and other cheap cyclicals, as evidence that multiples can keep expanding and U.S. stocks can keep rising.
Fundamentally and technically, Disney (NYSE:DIS) is in a potentially dangerous spot at the moment:
- DIS stock soared in April after the company announced the launch date and pricing for its Disney+ streaming service. But a sell-off into, and out of, fiscal third-quarter earnings in early August erased the secondary gains. DIS has bounced since, but another pullback could test the support that held earlier this month.
- The aforementioned strong earnings report from Netflix suggests that Disney’s primary streaming competitor is back on track. Admittedly, Netflix’s U.S. net subscriber adds of roughly 500,000 were below the company’s forecast. Still, it’s not a coincidence that DIS stock hit all-time highs immediately after Netflix’s big second quarter miss. The Q3 release shows that Netflix is still growing in the U.S., which means Disney+ will have to take some of its subscribers to drive the growth investors are hoping for.
- Disney’s earnings arrive toward the beginning of November and look increasingly key. Management will give the first data points on early adoption of Disney+. Meanwhile, earnings are headed for several quarters of pressure, as the company foregoes revenue from Netflix and invests behind its launch. For DIS stock to hold current levels, investor patience needs to hold through the transition. Recent selling suggests that it may not, and a break below $126 could portend a plunge back to $115 or worse.
Conagra Brands (CAG)
Since then, however, CAG stock has dropped 13%. And one of Thursday’s big stock charts now looks like a falling knife:
- It’s tough to tell where, or when, support will hold. Investors stepped in at $25 after the fourth quarter report in late June. If they don’t do so again, there’s a path to drop back to the $22 range at which CAG traded earlier this year.
- Such a decline would seem too far from a fundamental standpoint, as it would leave CAG trading at less than 11x FY20 consensus EPS. But the pressure on consumer stocks has been relentless. Investors in Kraft Heinz (NASDAQ:KHC) similarly thought the stock was “too cheap,” yet KHC now trades at 11x profits (albeit with a larger debt load).
- CAG seems like a proxy for the consumer space as a whole. The sector looked significantly challenged last year, but many names have managed to rally this year. The selling pressure in CAG stock suggests investor sentiment has weakened — and puts a great deal of pressure on earnings in the category over the next few weeks.
As of this writing, Vince Martin has no positions in any securities mentioned.