A green day for the broad market on Tuesday seems to bode well going forward. Trading has been choppy for the past few weeks — and indeed the past few months — but a 1% rise puts the S&P 500 in position to retake the 3,000 level. New all-time highs could be next.
That said, investors would be forgiven for not trusting U.S. equities just yet. Past efforts to hold the S&P at 3,000 and the Dow at 27,000 have failed. Earnings season is at hand, and stocks tumbled in July as the second-quarter earnings calendar peaked. And there’s still a concern that this year’s Q4 could be a repeat of last year’s sell-off.
Still, Tuesday’s buying suggests that at least some investors are confident. And so do these three big stock charts. Two solid earnings moves in the financial space and a rally in a large-cap tech name suggest comfort with both valuation and near-term risk. If that comfort holds, and earnings cooperate, the rest of the market could move similarly higher in the coming weeks.
JP Morgan Chase (JPM)
Earnings season kicked off Tuesday with reports from JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), and Wells Fargo (NYSE:WFC). All three stocks rallied after earnings beats — and the optimism in the reports likely contributed to gains across the market.
From a technical standpoint, JPM stock looks like the most intriguing of the group at the moment. The stock briefly touched an all-time high after an impressive quarter. But as the chart above shows, the stock retreated in afternoon trading and returned to September levels. That’s important for several reasons:
- Similar levels around $118 have held as resistance going back to early last year.
- Cyclical and interest rate fears have driven fundamental pressure as well. The earnings multiples assigned JPM stock and other financials have continued to compress in response to what has been perceived as increasing near- to mid-term risk. At less than 12x earnings, JPM still is cheap enough to draw in buyers — if those buyers are confident enough to take on those risks.
- If JPM stock finally can break out even in this lower-rate environment, that could signal a rush into other financials as well. It could even be good news for cyclical plays, many of which remain relatively cheap on a headline basis.
Charles Schwab (SCHW)
After a 5.4% gain following third-quarter earnings, shares of discount broker Charles Schwab (NYSE:SCHW) look set to fill the gap created by last month’s sell-off.
That gap down was created by the company’s move to zero commissions, a shift followed by the rest of the industry. SCHW stock dropped 9.7% on the news, and wound up declining 15% in just four sessions. Value buyers stepped in as SCHW touched its lowest level in almost three years. A solid earnings beat on Tuesday morning added to the optimism and sets up an interesting technical and fundamental situation:
- SCHW stock still has 5%+ upside if it can fill the gap to the Sept. 30 close of $41.83. Traders on Wednesday may well bet on such a move, and that could keep the recent rally going.
- Fundamentally, shares still look cheap. SCHW stock trades at just 15.5x 2019 consensus EPS, with those estimates likely to rise after a 10 cent beat on Tuesday morning.
- Optimism here could help shares of rivals like E*TRADE Financial (NASDAQ:ETFC) and TD Ameritrade (NASDAQ:AMTD), both of which similarly have bounced in recent sessions. But in this group, too, interest rate risks are significant. And the obvious fear — a fear that is paused for now — is that competition will spread to interest revenue and order flow.
After a 3% gain on Tuesday, Facebook (NASDAQ:FB) stock somewhat quietly has risen over 8% in just nine sessions. It’s not alone. Other mega-cap tech names like Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) and Apple (NASDAQ:AAPL) have shown strength.
The near-term technical question for FB stock is whether it can break through resistance from last month that held around $190. But that’s not the most interesting part of the rise:
- Again, large-cap tech names have risen sharply. At this point, most would be considered value plays, including FB stock, which backing out cash trades at 18x 2020 consensus EPS. Meanwhile, unprofitable growth names are falling. That includes recent IPOs like Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) — but other high-flyers like Shopify (NYSE:SHOP) and Roku (NASDAQ:ROKU) have seen recent tumbles. Do the gains in the biggest names finally signal the long-awaited shift from growth to value?
- The buying in FB stock and its large-cap peers — AAPL trades just off an all-time high — seems to suggest optimism toward earnings later this month. It’s worth remembering that large-cap tech earnings helped drive a sell-off in July, with AAPL and Amazon (NASDAQ:AMZN) among the stocks to fall. Better reports from the market’s biggest companies could drive broad market strength.
- FB stock in particular still hasn’t recovered from 2018’s second quarter report, which drove the largest one-day loss of value in the history of world equity markets. If it can break out here and follow up with a strong Q3 report, a return to $210+ could be in the cards. And with the stock still cheap, the rally can continue from there.
As of this writing, Vince Martin has no positions in any securities mentioned.