The consumer that has held up the U.S. economy — and by extension the stock market. Industrial numbers have been shaky over the past twelve months, and global growth has been hit-and-miss. Consumer spending has been strong and steady, however.
That strength has been enough to move U.S. stocks to all-time highs. And at the moment, there’s not much sign of market weakness. Even with quiet trading Tuesday, the three major indices closed in the green for the fifth consecutive session.
That strength — both in recent days and over the past few years — is reflected in Wednesday’s three big stock charts. But those same charts also share the underlying worry facing the market as a whole. Yes, recent performance has been impressive, but for how long can that performance really last? And what happens if and when consumers finally pull back?
Chipotle Mexican Grill (CMG)
When Chipotle Mexican Grill (NYSE:CMG) was featured in this space back in late October, the picture looked very different. CMG stock already was headed in the wrong direction, and the chart suggested further declines to a key level around $740.
That’s indeed how it played out and Chipotle stock has responded well. But the first of our big stock charts now shows a move to another key level:
- Simply put, resistance looms. CMG stock unsurprisingly broke down in October after a multiple top at $850, and the current rally is about two percentage points shy of re-testing those levels again.
- What’s interesting is that the story doesn’t seem all that different this time around. It’s not as if third-quarter earnings, which sent shares falling in October, were soft. In fact, they were enormously impressive, particularly relative to Wall Street expectations. But valuation was such that even a monster beat wasn’t quite good enough.
- In that context, resistance may well hold again — and CMG’s test of that resistance looks like a potential test for the market as a whole. This is not a cheap stock, at 46.5x next year’s consensus earnings per share estimates. Recent trading in CMG suggests there is a limit to what investors will pay even for quality growth stories. If that limit still exists, resistance here may hold heading into 2020.
Spotify Technology (SPOT)
Shares of Spotify (NYSE:SPOT) are moving quickly toward past resistance. As with CMG, valuation is a question mark. But there’s a bit more optimism toward a breakout here:
- Resistance does look worrisome. That’s particularly true given SPOT stock quickly reversed at that level in early November, after breaking out following an impressive Q3 report of its own. But there’s also a potentially bullish exit from a triangle pattern, and a bit of a cup and handle setup. Meanwhile, a “golden cross” is set to form as the 50-day moving average crosses above the 200DMA, likely in the next few sessions. That might be enough to bet on a breakout, even if volume of late isn’t quite what a bull would like to see.
- Certainly, the stock will need help from sentiment toward growth stocks. Spotify’s opportunity in streaming audio is large, and its move into podcasts is paying early dividends. But this also is a company that isn’t expected to be profitable until 2021, at least based on Wall Street estimates. With a market capitalization near $28 billion, a “risk-on” attitude needs to hold in the broader market.
- In that context, SPOT looks like a potential test for the market as a whole. This is a stock that neared $200 last year, only a few months after its direct listing. Investors were willing to pay up for the stock in the past. If they’re still willing to do so, that would be good news for other high-flyers with valuation concerns. And it might confirm that the sell-off in many of those names seen this summer finally is in the rearview mirror.
Boston Beer (SAM)
Boston Beer (NYSE:SAM) is heading toward a decision point. And it might be the broader market that tips the scales:
- SAM stock has established an almost textbook triangle pattern, with its range steadily narrowing over the past three months. Right now, the chart probably leans modestly bearish, with near-term moving averages providing resistance in the last few sessions amid mixed trading. There’s certainly a case for SAM to slip back toward the 200-day below $360, with $340 the next key level.
- Again, valuation is a concern here. SAM is driving nice growth in sparkling water, but the legacy beer business is facing challenges. It’s not just macro brewers like Anheuser-Busch InBev (NYSE:BUD) and Molson Coors (NYSE:TAP) that are struggling; craft sales are fading as well. This week, I called SAM stock one of three sin stocks to avoid this holiday season, and at 31x forward earnings shares certainly aren’t cheap.
- That said, there’s also a case for a reversal to the upside here. It doesn’t take much of a move higher for a path to a breakout to take shape. Skeptics have been defied here for years; SAM stock has been a popular short target, but has more than doubled in the past two years. The chart, like the stock, right now likely is in the eye of the beholder. Another leg up in the broad market rally might be enough for the bulls to start winning once again.
As of this writing, Vince Martin has no positions in any securities mentioned.
