An earnings season-driven rally for U.S. stocks came to an end on Thursday. The S&P 500 ended a streak of all-time closing highs, while the Dow Jones Industrial Average dropped half a percentage point despite a 2.3% rally in component Apple (NASDAQ:AAPL).
To be sure, modest declines in a single session don’t suggest market gains have come to an end. But Thursday’s news — including a big miss for the Chicago Purchasing Management Index and conflicting reports on the trade front — likely was an unwelcome reminder for investors. Earnings reports remain strong for U.S. companies, but external risks persist.
Friday’s three big stock charts highlight that mixed sentiment. They include two companies who posted earnings beats on Thursday and saw their share prices dip anyway. Combined with another well-known company with big exposure to China, these big stock charts show the uncertainty in the market at the moment, even with market indices so close to all-time highs.
Technically and fundamentally, the pullback in Altria (NYSE:MO) on Thursday looks concerning. After all, there’s an obvious case for Altria stock at the moment. MO stock is cheap at 10x forward earnings. A 7.3% dividend yield is one of the highest among large-cap stocks, and still looks well-covered by cash flow.
Obviously, vaping-related concerns around Juul, in which the company has taken a stake, are a key factor. But I wrote last month that increased regulation might actually help both Altria and Juul, The first of our three big stock charts, however, shows that investors weren’t buying that case on Thursday — which is a problem for MO stock:
- Altria stock actually reversed from a positive open, which changes the technical picture. Investors now have to hope that 20- and 50-day moving averages act as a support.
- The fade in recent sessions kept MO stock from challenging the high trend line of a descending broadening wedge. This is a stock that just two weeks out looked poised for a breakout through that line as it broke above moving averages. Now it’s set to test support levels at $44 and then potentially $39.
- Fundamentally, this is a cheap stock that posted an earnings beat and sold off anyway. A $4.5 billion impairment charge on the Juul investment may have been partially to blame. But that impairment wasn’t a surprise, given the pressures on vaping. It looks like the report simply wasn’t good enough. If that’s the case, MO stock lacks a catalyst until early next year. That suggests that MO stock may well stay cheap, at least in the near-term.
Wynn Resorts (WYNN)
Like Altria stock, Wynn Resorts (NASDAQ:WYNN) had posted a nice bounce off the lows before a decline on Thursday. And like Altria stock, the bull run made perfect sense in the context of the chart. A multiple bottom just above $100 showed solid support. And Wynn busted through not just the 20 and 50 DMAs, but the 200 DMA.
But second of our big stock charts looks a bit less bullish after Thursday’s 1.9% decline and ahead of Wednesday afternoon’s Q3 earnings report:
- WYNN is not far from failing to re-take the 200-day moving average, which would suggest the rally might have stalled out. So does the relatively low volume seen during the rally. If that’s the case, the bullishness suggested by strong support is offset by concern that WYNN has set another lower high, creating a so-called descending triangle formulation.
- Like MO, WYNN still looks reasonably attractive from a fundamental standpoint, even if the stock isn’t nearly as cheap. Admittedly, an 18x forward earnings multiple isn’t that low in the context of casino operators. Rival Las Vegas Sands (NYSE:LVS) trades at a similar multiple, while Melco Resorts & Entertainment (NASDAQ:MLCO) is modestly cheaper. The stock might not look like a steal on its face, but it’s certainly cheap enough for China bulls to enter, and a 3.3% dividend yield helps the case for income-focused investors.
- Of course, Thursday’s weakness highlights the problem: there simply may not be that many China bulls left. WYNN still is down 50% from 2014 peaks and has dropped almost 40% from 2018 highs. Concerns about demand (and regulation) at the company’s casinos in the Chinese enclaves of Macau are a key reason why. If trade war worries are set to spike again, that could offset any good news from the Q3 report — and in the worst-case scenario would mean that WYNN will have to test support once again.
Church & Dwight (CHD)
Consumer products manufacturer Church & Dwight (NYSE:CHD) seems to be in the eye of the beholder after a 7% decline following Q3 earnings on Thursday. That’s true both fundamentally and technically:
- In terms of the chart, a longer-term uptrend has broken. But in the near term, the third of our big stock charts shows the beginning of a falling wedge, which often portends a bullish reversal. I’d note the volume in the last two months, however, which has been higher than normal during a period in which CHD has declined. That might tip the scales to a bearish interpretation.
- The fundamentals support some skepticism. Church & Dwight stock has fallen 13% since the beginning of September. But it’s hardly cheap at nearly 26x 2020 consensus earnings per share estimates. Given those estimates only suggest 9% growth year-over-year, and may come down after soft guidance for the fourth quarter, there’s obvious room for further multiple compression.
- But that compression might come down to investor sentiment. Larger rival Procter & Gamble (NYSE:PG) has seen its valuation expand markedly over the past eighteen months. Investors have reverted from worrying about the health of the consumer packaged goods sector to seeing it as a bastion of safety. If Colgate-Palmolive (NYSE:CL), which has struggled of late, can rally after its earnings report on Friday morning, that shift may hold, and CHD can bounce back. But a sell-off in CL could mean that valuations in the space have run too far. If that’s the case, CHD will have further to fall.
As of this writing, Vince Martin has no positions in any securities mentioned.