Wednesday’s three big stock charts cover names that have done well in the market’s recent rally. That rally paused briefly on Tuesday, with major indices mixed. But even that performance might be considered positive in the context of the day’s news.
After all, early results from the beginning of the retail earnings season look disappointing. Kohl’s (NYSE:KSS) shares plunged after a Q3 earnings miss that brought down other department store names like Macy’s (NYSE:M) as well. Home Depot (NYSE:HD), too, posted results below expectations, and its shares fell over 5%.
To be sure, housing figures were solid and in line with estimates, but given Home Depot’s miss and a 50% gain year-to-date in the iShares U.S. Home Construction ETF (BATS:ITB) that doesn’t seem like a significantly positive catalyst.
It’s not hard to imagine Tuesday’s news spooking investors. Yet they mostly shrugged. It’s worth asking whether that’s good news, in that it highlights confidence across the equity market, or a sign that perhaps investors are being too cavalier relative to some of the potential risks in U.S. stocks.
Wednesday’s big stock charts cover three names for which that question seems important at the moment. All three have gained nicely along with broad markets in the past few months. But all three have at least a risk of pulling back, which might suggest that U.S. stocks have the potential to do the same.
Alphabet (GOOG) (GOOGL)
It looked just a couple of sessions ago like Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) was going to continue its breakout. But back-to-back declines despite green days for the tech-heavy NASDAQ Composite suggest that maybe the rally in GOOG stock, the first of Wednesday’s big stock charts, has ended:
GOOG stock clearly broke through resistance that had held below $1,300 twice this year and even back at 2018 highs. With other big tech names like Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) similarly breaking out, there seemed little, if anything to slow Alphabet stock down. Yet investors have sold off the stock so far this week, even if the GOOG stock price admittedly has declined just 1.5%.
- To be sure, two red sessions don’t suggest a reversal is imminent. And as I wrote this week, there’s still a fundamental case for Alphabet stock to become the fourth name to reach a $1 trillion market capitalization. But coming into this week, the so-called “trillion dollar curse” seemed like the biggest potential roadblock to GOOG stock. No longer.
- Alphabet’s trading is interesting relative to the market as a whole. The rallies in the likes of AAPL and MSFT along with pullbacks in many high-valuation names suggests that tech investors have gone from “growth at any price” to “quality at any price.” If GOOG stock stalls out, however, perhaps even that shift is near an end. At that point, valuation becomes a concern for all of tech — which could be dangerous with the NASDAQ at all-time highs.
Rite Aid (RAD)
Rite Aid (NYSE:RAD) has been one of the market’s best stocks over the past three months. Among nearly 3,500 stocks with a market capitalization above $300 million, only 25 have outperformed RAD stock over that stretch. The chart suggests that gains could continue, but also shows that a reversal is possible:
- RAD stock established a bullish inverse head-and-shoulders pattern, but that pattern has played out. The pullback from early-month highs in that context seems more concerning. Volume has faded. RAD stock is hugging moving averages, which could form resistance. And the stock now is toward the bottom trendline of a bearish ascending narrowing wedge. A modest decline from current levels suggests a reversal to the downside, with only the 200-day moving average acting as support.
- And where RAD stock goes from here might depend more on the market than anything Rite Aid itself does. Fiscal third-quarter earnings likely don’t arrive for another month. So will investors keep buying pharmacy stocks, as they have with not only Rite Aid, but CVS Health (NYSE:CVS) and Walgreens Boots Alliance (NASDAQ:WBA)? And are those investors willing to take on a heavily indebted retailer with thin margins — the very definition of a high-risk, high-reward play?
- I’ve long been bearish on RAD stock myself, but a new CEO and better results of late do suggest some optimism. Rite Aid has a lot of work left to do to drive consistent growth and tackle a debt load that still exceeds $3 billion. But the long-term rewards could be huge with some success. Walgreens, after all, agreed to pay a reverse split-adjusted $180 per share back in 2016. Near-term trading, however, might reflect sector and market sentiment as much as the hopes for those potential rewards.
I’ve been as surprised by the breakout in AT&T (NYSE:T) as anyone. AT&T has lost market share in wireless, has an albatross in DIRECTV, and is behind Netflix (NASDAQ:NFLX) and Walt Disney (NYSE:DIS) in streaming. There are significant risks here.
But as the last of Wednesday’s big stock charts shows, investors have come around to the bull case for T stock. But a 4% decline on Monday suggests the recent rally could reverse as so many have this decade:
- The sell-off pushed T stock through both the 20-day and 50-day moving averages. It erased the gains achieved since October’s third quarter earnings beat. Technicals aside, a 4% based off a single downgrade from a smaller analyst, MoffettNathanson, hardly suggests a market confident in AT&T stock. MoffettNathanson is well-regarded in the media vertical, but it’s not generally a firm that moves stocks — and certainly not stocks the size of AT&T.
- That said, there’s good news here. A late-session rally kept T stock at least above the 50DMA. $38 did hold as resistance a few times heading into earnings, and now could flip to support. The uptrend here has been intact since May; it’s not broken yet.
- At this point, T stock might be a bellwether. It’s a leveraged turnaround play trying to integrate a massive acquisition while paying a hefty dividend. IBM (NYSE:IBM) and Kraft Heinz (NASDAQ:KHC), to name two, sound quite similar.
- A market willing to stretch for value with AT&T despite balance sheet and execution risks might next choose to do the same with IBM or KHC. Conversely, the worry is that in this market investors feel they have to stretch for value at all.
As of this writing, Vince Martin has no positions in any securities mentioned.