There’s an interesting combination of fundamental and technical factors at play for U.S. stocks at the moment. An obviously important earnings season looms. Big banks JPMorgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC) report third-quarter earnings Tuesday morning, leading a string of major companies on the earnings docket. Second-quarter earnings this year proved to be a negative catalyst for the broader market: the S&P 500 peaked on July 26 and promptly fell 6% over the next six trading sessions.
Investors obviously are worried about a repeat of that performance. Worse yet would be a repeat of last year’s steep fourth quarter sell-off. And those worries seem to be keeping a technical lid on U.S. equity markets.
The S&P 500 has made a few runs at 3,000 since the late July sell-off. All have failed. Whether it’s the psychological effect of S&P 3,000 — or the 27,000 level that has mostly proven resistance for the Dow Jones Industrial Average — or simple profit-taking, all-time highs have remained elusive.
But a breakout early in earnings season could change that. On the other hand, early weakness could signal a potential earnings recession this quarter which might trigger a sell-off not dissimilar to that seen in 2018.
In that context, after a moderately red Monday, there are three big stock charts to watch in the consumer sector. That sector is driving the economy — and the market. Divergent responses to two recent earnings reports, and positioning ahead of a hugely important release due at the end of the month, highlight the mixed sentiment of the market right now. And so these three charts look important for their stocks, but maybe the rest of this uncertain market as well.
Darden Restaurants (DRI)
Darden Restaurants (NYSE:DRI) has been perhaps the best story in the restaurant sector in recent years. An activist-driven turnaround boosted performance at the company’s Olive Garden business. DRI stock tripled in a little over five years and touched an all-time high last month.
But a disappointing fiscal Q1 report last month sent DRI stock plunging, and the chart now shows an outright falling knife. That makes DRI one of our big stock charts for several reasons:
Click to EnlargeVolume in recent sessions has been high and DRI has kept declining. A 2%+ decline in a relatively flat market Monday suggests traders are still selling — and/or a larger position is exiting.
- Support for DRI stock isn’t necessarily obvious. Resistance did hold briefly at current levels in February, but that hardly suggests $110 will provide support this time around. Value buyers may step in as DRI’s FY20 P/E multiple compresses to a bit over 17x, but if growth expectations have changed, even that may not be cheap enough.
- DRI’s weakness has spread to shares of casual dining rivals like Brinker International (NYSE:EAT) and Dine Brands Global (NYSE:DIN). Ahead of earnings season, the obvious risk is that DRI stock is the canary in the coal mine for the broader restaurant industry — or even the consumer sector that is carrying the U.S. economy at the moment.
Of course, investors looking for optimism ahead of earnings season might well point to Nike (NYSE:NKE) instead. NKE stock sits an all-time high after a blowout fiscal Q1 report last month. And the strength in NKE stock of late has been notable for several reasons:
- There has been some external noise. NKE stock sold off amid the dispute between China and the NBA (National Basketball Association). The company reportedly was aware of anti-doping efforts by a track coach, which led Nike to shut down a camp for endurance athletes. Yet investors have shrugged off the noise and bought NKE stock anyway.
- The gains are particularly intriguing in the context of the U.S.-China battle. Little credible positive news has emerged, despite multiple rumors, yet NKE stock keeps rallying. 27% constant-currency growth in that market in Q1 is a good reason why. NKE’s strength bodes well for stocks like Starbucks (NASDAQ:SBUX) and Yum China Holdings (NYSE:YUMC), where investors have worried that the trade war might drive anti-American sentiment.
- Technically, the breakout from a multi-month trading range looks like good news. In this bull market, breakouts tend to keep going. NKE stock isn’t cheap, but it may well have a path to $100+ with even modest help from broader market sentiment.
Of course, NKE isn’t the only — or the largest — China-exposed stock reaching an all-time high. Apple (NASDAQ:AAPL) stock closed modestly red on Monday, after setting a new all-time closing high of $236.21 on Friday.
Obviously, AAPL stock matters to the market simply because of its size. The rally of late has led it to pass Microsoft (NASDAQ:MSFT) as the world’s most valuable company. (Presumably the race actually is too close to call at the moment.) Its size alone means it can move the S&P 500. And its $236 handle gives it outsized impact on the oddly price-weighted Dow Jones. Only Boeing (NYSE:BA) moves that index more.
But that’s not the only reason AAPL is one of the big stock charts at the moment:
- Like NKE, AAPL stock reflects surprising confidence toward the Chinese economy at the moment. In the first three quarters of fiscal 2019, Apple generated roughly a quarter of its profit in Greater China. Given the trade war and Hong Kong protests, one might well think China posed a risk to AAPL stock. Investors, at least for now, seem to disagree.
- Like NKE, AAPL has broken out. But unlike NKE, there isn’t an obvious near-term catalyst for the move. As seen in the chart above, Apple shares actually sold off following fiscal Q3 results in July. AAPL has gained over 20% since then on very little news.
- Those gains also create risk, however. For one, expectations clearly are rising ahead of the Q4 report on Oct. 30. And as far as the rest of the market goes, there’s one obvious question: If broad market indices can’t rise even with AAPL stock and MSFT stock at all-time highs, what happens to those indices if either tech giant stumbles?
As of this writing, Vince Martin has no positions in any securities mentioned.