After all three major market indices closed at all-time highs on Monday, U.S. stocks were quiet on Tuesday. The Dow Jones Industrial Average gained barely one-tenth of a percentage point; the S&P 500 lost roughly the same amount.
For now, Tuesday’s trading seems only like a pause. Earnings still seem strong enough to drive optimism, even though Uber (NYSE:UBER), Chesapeake Energy (NYSE:CHK) and Shake Shack (NYSE:SHAK) all saw sharp declines following their reports. The macro picture looks solid, and trade war optimism continues to build.
Meanwhile, there are stocks that haven’t yet joined in the rally — which suggests that at least some opportunities still remain in this bull market. Wednesday’s big stock charts highlight three of the names left out of the recent optimism.
But as those charts show, just because a stock hasn’t rallied yet doesn’t mean it’s necessarily going to. In fact, at least two of Wednesday’s big stock charts seem to show more downside ahead.
As the first of our big stock charts shows, PepsiCo (NYSE:PEP) is breaking down. Fundamentally and technically, there’s a case that downside can continue:
- An ascending narrowing wedge generally suggests bearishness, and PEP stock now has slipped out of the range, which portends a continued reversal. PEP stock also has fallen below moving averages, with the 200-day moving average the next support level below $130.
Click to EnlargeInterestingly, PEP stock isn’t alone. Trading in rival Coca-Cola (NYSE:KO) looks similar. As predicted in this space last week, KO stock fell out of a triangle pattern and seems to have downside before it tests its own 200DMA.
- Fundamentally, it’s not clear why the two beverage stocks are pulling back. There may be a bit of a “risk-on” trade at the moment. It’s also worth noting that neither stock yet looks cheap. PEP stock, for instance, still trades at 22x forward earnings, while KO stock is a turn more expensive. Investors looking for value, or dividends, would do well to stay patient.
The weakness in PEP stock could be a sign that investors are swapping out some defensive names for higher-reward cyclical plays. Recent trading in packaging giant and S&P 500 component WestRock (NYSE:WRK) adds another data point to suggest that might be the case. WRK stock has rallied nicely of late — and the second of our big stock charts suggest a breakout could be at hand:
- WRK stock is facing resistance that has held for much of the year just below $40. Getting through that level would confirm the uptrend and suggest a rally to at least early-year highs closer to $42.
Click to EnlargeAnd if WestRock stock can break out, the rally could be huge. As the monthly chart shows, this is a stock that more than doubled in two years and then gave back nearly all of those gains. If a reversal truly is at hand — and that appears to be the case — then technically there’s still quite a bit of room for WRK stock to run before it faces resistance.
- That seems true from a fundamental standpoint as well. WRK certainly is cheap enough, at less than 12x forward earnings. The cyclical nature of the industry does suggest a below-market multiple, but that multiple still can expand and the stock offers an attractive 4.6% dividend yield. If investors are willing — and eager — to take on more risk, WestRock stock could be a prime beneficiary.
The situation seems reversed for tax preparation giant Intuit (NASDAQ:INTU). The last of our big stock charts shows reason for real caution, as do fundamental factors:
- The recent pullback to a four-month low gets INTU out of the uptrend that had held in recent months. Moving averages clearly have acted as resistance, and INTU stock now is below the 200DMA as well.
- The next support level looks to be $240, which held this spring. If that doesn’t hold, however, the declines can accelerate.
- Fundamentally, there are concerns as well. INTU stock isn’t cheap at nearly 30x forward earnings. And near-term trading could be affected by the 2020 U.S. presidential election. Intuit and other tax preparers have managed to keep the Internal Revenue Service from offering a free service for taxpayers. A win by a progressive candidate like Elizabeth Warren or Bernie Sanders could raise investor concerns that the U.S. government could become a competitor — and that simply is not priced in, even with the recent pullback in INTU shares.
As of this writing, Vince Martin has no positions in any securities mentioned.