There’s reason for cautious optimism toward U.S. stocks at the moment. Broad market indices rose nicely on Monday, save for the Dow Jones Industrial Average, which was dragged down by yet another decline at Boeing (NYSE:BA). The S&P 500 closed above 3,000, and sits less than 20 points shy of all-time highs.
Still, the key word there is “cautious.” Earnings season ramps up this week, with key reports to watch from the likes of Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN), and Procter & Gamble (NYSE:PG). It was at a similar point in second quarter earnings season that U.S. stocks turned south. Meanwhile, as Tuesday’s big stock charts show, news across the market remains somewhat uneven.
Boeing isn’t the only mega-cap stock facing significant challenges at the moment. Pressure on software names has spread to even one of the group’s best plays. On the other hand, a historically volatile and cyclical sector has rebounded nicely, leaving one of its key equipment manufacturers in an interesting spot a few weeks before its own earnings report. Investors looking for the direction of this choppy market would do well to take a long look at these three big stock charts.
Johnson & Johnson (JNJ)
The bad news for Johnson & Johnson (NYSE:JNJ) just keeps coming. Potential legal liabilities surrounding the company’s baby powder and its opioid business seem likely to reach the billions of dollars. Those risks have kept a lid on JNJ stock, which has traded sideways for over two years now.
JNJ stock did post a rally in recent sessions. But a 6% decline on Friday in response to a recall of the company’s Johnson’s Baby Powder ended that rally — and shows just how much faith has been lost.
J&J recalled a single lot of the product, which included “sub-trace” levels of asbestos contamination. (“Sub-trace”, according to the company, meant no greater than 0.00002%.) That was enough to erase over $20 billion in market value. And the trading Friday leaves JNJ stock in an interesting spot technically, making it one of our three big stock charts:
Click to EnlargeSupport for JNJ stock now has held repeatedly of late. And even going back to 2018, buyers generally have stepped in when the stock has become cheap enough. The obvious question is if, and when, that support will break.
- Friday’s decline and the rising legal risk also offsets the good news from earnings last week. JNJ handily beat analyst estimates and raised full-year guidance. It was the kind of quarter that could lead the stock to challenge this summer’s highs above $140. Yet the news quickly was drowned out amid coverage of opioid settlements and ongoing talcum powder legislation.
- Fundamentally, JNJ stock does look attractive at the lows, as I argued at the beginning of this month. But the chart shows that support needs to hold. And Friday’s decline means JNJ stock likely lacks a catalyst until at least its fourth quarter report in late January.
Adobe (NASDAQ:ADBE) has been in a downtrend for the last three months. It started slipping in late July, along with the rest of the market — and hasn’t yet recovered. With fiscal Q4 earnings not until December, near-term trading looks interesting for several reasons:
- Technically, the downtrend is obvious, with a clear pattern of lower highs and lower lows. ADBE hasn’t found support yet, but $260 looks like a key level for the stock.
Click to EnlargeRecent trading is a notable departure for ADBE stock. The stock only has seen a three-month pullback once since 2011. That occurred late last year, when broad markets were plunging. This situation is quite different: the NASDAQ Composite has declined just 2% over the same stretch ADBE has dropped almost 15%.
- The struggles in growth stocks of late have been well-covered, with fellow SaaS names like Workday (NASDAQ:WDAY) and Splunk (NASDAQ:SPLK) dropping sharply. But ADBE stock would seem to be a different animal. It’s a well-established leader. Valuation is not particularly aggressive at less than 27x forward earnings backing out net cash. If ADBE stock can’t find a bottom, that could be trouble for other quality software plays like Intuit (NASDAQ:INTU), Automatic Data Processing (NASDAQ:ADP), and even MSFT.
Applied Materials (AMAT)
While software stocks have struggled, semiconductor stocks have rallied. Equipment manufacturer Applied Materials (NASDAQ:AMAT) has been one of the beneficiaries, bouncing about 17% from late August levels. It’s just one of the big stock charts in the sector:
Click to EnlargeAMAT above $52 is testing long-held resistance. It’s not alone. The iShares PHLX SOX Semiconductor ETF (NASDAQ:SOXX) is doing the same. A breakout for AMAT could set up a path to early 2018 highs just above $60. A breakout for the index, particularly with earnings report help from the likes of Advanced Micro Devices (NASDAQ:AMD) and Intel (NASDAQ:INTC), could signal more upside ahead for the group.
- In the meantime, AMAT’s current strength bodes well for the sector. It was AMAT and fellow semi-cap Lam Research (NASDAQ:LRCX) that were proverbial canaries in the coal mine for last year’s chip sell-off. This time around, AMAT and LRCX are outperforming the sector as a whole.
- Fundamentally, AMAT is strong enough to bust through resistance and break out. Forward P/E sits barely above 15x. Broader trends like IoT (Internet of Things) and datacenter growth should drive demand higher for years to come. The likes of AMD, INTC and Nvidia (NASDAQ:NVDA) often grab the semiconductor headlines. But AMAT should be watched closely ahead of chip sector earnings — and its own report next month.
As of this writing, Vince Martin has no positions in any securities mentioned.