U.S. equities continue to mostly drift higher. The Dow Jones Industrial Average led the way on Wednesday, thanks to strength at Disney (NYSE:DIS). The S&P 500 and NASDAQ Composite closed basically flat.
The trading adds to the sense that, even with those indices at or near all-time highs, investors aren’t exactly flooding into stocks. And still-present weakness in growth stocks, and an apparent shift from growth to value, further suggest that this isn’t exactly a “risk-on” environment.
Thursday’s big stock charts highlight three names that could be impacted by those trends. They include one of the market’s best growth stocks in recent months, which looks at risk for a pullback. Two other key charts highlight value names heading in the wrong direction — and looking for investors to step in.
In all three cases, broad market sentiment may well play a key role in how near-term trading plays out.
Gilead Sciences (GILD)
The near-term question for Gilead Sciences (NASDAQ:GILD) seems obvious at this point: will near-term support hold again? There is some evidence in the first of Thursday’s big stock charts to suggest that it might not:
- The combination of lower highs and steady lows creates a so-called descending triangle formation. Meanwhile, GILD stock now has dipped below its 20-day, 50-day and 200-day moving averages. Both factors generally are bearish, and at the least put more pressure on support if it indeed is re-tested, as appears likely.
- Fundamentally, GILD stock is cheap. But as I wrote this month, it seems cheap for good reason. Earnings have been in decline for years before stabilizing this year, largely due to lower sales of HCV (hepatitis C virus) treatments. The shift to HIV (human immunodeficiency virus) products has helped, but Gilead needs to find another growth driver.
- One reason for optimism, admittedly, is GILD’s dividend yield. It doesn’t seem like a coincidence that support has held at $62, given that yield clears 4% at $63. Similar trading has taken place in other pressured but stable names like Exxon Mobil (NYSE:XOM).
- But the worry for GILD right now is that the yield might be the strongest pillar of the bull case — and dividends on their own usually aren’t enough to keep support intact. Meanwhile, the likes of GlaxoSmithKline (NYSE:GSK) and AbbVie (NYSE:ABBV) both offer higher yields. If the Gilead dividend is the core pillar of the bull case, it might not be enough.
DocuSign (NASDAQ:DOCU) has been one of the best growth stocks in the market, gaining over 50% just since August. But there’s some evidence in the second of our big stock charts that the rally might be nearing an end:
- The chart shows two narrowing ascending wedge patterns, both of which usually are bearish. Admittedly, DOCU stock has exited the lower end of those wedges with no effect so far, and the 20-day moving average still is acting as support. A reversal may not be imminent — but it’s certainly possible.
- That seems particularly true in a market that still seems to have some valuation questions. Among stocks with a market capitalization above $10 billion, 2019’s five best performers — Roku (NASDAQ:ROKU), Sea Limited (NYSE:SE), Snap (NYSE:SNAP), Carvana (NYSE:CVNA) and Shopify (NYSE:SHOP) — all have seen recent pullbacks.
- Those are all attractive businesses. Valuations simply got too stretched. With DOCU stock at $67, a similar dynamic could play out, as I wrote this week. A forward price to earnings multiple of 170x seems dangerous at the moment. And with volume low during this leg of the rally, the conviction may not be there to hold the current valuation if any selling pressure materializes.
Western Digital (WDC)
Western Digital (NASDAQ:WDC) fell out of the same bearish ascending wedge that puts DOCU stock at risk. After that reversal, the last of Thursday’s big stock charts still looks bearish:
- Recent trading, including a 2.9% decline on Wednesday, pushed WDC stock below its 200-day moving average. And while DOCU stock has seen light volume during the last leg of its gain, Western Digital shares are seeing heavier-than-usual volume as they decline. With the 200-day moving average broken, there’s no clear support level for the stock on the near-term horizon.
- WDC stock is cheap — but memory chipmakers usually are. Peer Micron Technology (NASDAQ:MU) too has seen some weakness in recent trading. For both WDC and MU, pricing is key, and both charts suggest investors are worried that recent pricing stabilization may reverse.
- The weakness in memory plays is particularly concerning given that the rest of the chip sector is sizzling, with breakouts in major names like Advanced Micro Devices (NASDAQ:AMD), Intel (NASDAQ:INTC) and Qualcomm (NASDAQ:QCOM). Investors betting on the broad trends that can boost the semiconductor industry — Big Data, Internet of Things, and self-driving cars among them — seem to be looking to markets outside of memory. The WDC stock chart suggests that focus will persist.
As of this writing, Vince Martin has no positions in any securities mentioned.