The human toll of the coronavirus continues to mount, and though it pales in comparison, so does the effect on equities. Stocks were routed globally on Monday, and U.S. markets were not immune. The S&P 500 declined 1.57%, and the NASDAQ Composite fared even worse with a 1.89% loss.
There’s an obvious worry that the declines can continue. Valuation concerns already dogged U.S. stocks before recent trading. Both domestic and Chinese equities had gained nicely in recent weeks on optimism toward reduced trade war tensions.
That optimism could be dashed should the outbreak grow. Coronavirus headlines could even obscure a key week of earnings reports.
Tuesday’s big stock charts feature three names at particular risk if Monday’s trading is the beginning of a longer, broader sell-off. All three charts show significant reason for near-term caution and little room to manage a negative external catalyst. Momentum traders betting on further declines may see these stocks as particularly tempting short targets. Investors looking for safety may be heading for the exits.
United Parcel Service (UPS)
The potential impact of a pandemic on United Parcel Service (NYSE:UPS) is almost self-evident, and worrisome. Bu, as the first of Tuesday’s big stock charts shows, the technical picture is concerning as well:
- Based on the chart, UPS stock is clinging to support at the moment. Recent declines led to a bearish exit from a narrowing wedge pattern and a broader uptrend that began in August. Shares touched a three-month low on Monday, and a new descending channel seems established.
- That said, there are signs of potential support. Since a second quarter earnings beat in July, buyers have entered quickly when UPS dips below $115. Shares did see a bit of a “hammer chart” pattern in trading Monday, as investors bought an early dip. The 200-day moving average provides another support level modestly below Monday’s close.
Still, from a near-term perspective, support has to hold. The next key level looks to be about $105, where rallies stalled out before the Q2 release, and it can get worse from there. Rival FedEx (NYSE:FDX) is also is looking for a bottom, continuing a pattern called out as one of our big stock charts last month. The sector needs value buyers to step in. Will they?
Slack Technologies (WORK)
Slack Technologies (NYSE:WORK) stock has done little but decline since the company went public in June. As the second of Tuesday’s big stock charts shows, shares are weakening again, and support may give:
- Support has held repeatedly around $20 going back to late October. It will need to do so again — and that’s far from guaranteed. WORK stock still trades below its moving averages. The consolidation of the last three months has resulted in stable trading, but in a market that has rallied, particularly in tech. Other than the multiple bottom, there’s little to suggest much in the way of upside.
- Although Slack didn’t go the initial public offering route — it went public via a direct listing in June — its stock has been swept up in the sentiment toward 2019 IPOs like Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT). Even in that context, the sideways trading over the past few months looks concerning. Those ride-sharing giants both saw their shares bounce at least 30%. WORK, in contrast, hasn’t seen even a 20% gain during its rangebound trading — which suggests an inability to generate momentum even in a more bullish market.
- Now the near-term picture seems worrisome. High-growth but unprofitable names quickly go out of a fashion in a nervous market. Earnings don’t arrive until March. There’s a clear case that, this time, WORK won’t be able to hold $20, as bulls retreat to safety.
- There is a mid- to long-term argument for WORK, as I discussed just this week. Competition from Microsoft (NASDAQ:MSFT) Teams has been a big factor in the sell-off, but as Ian Bezek argued in December the two companies can co-exist. But even bulls might want to put WORK on a “buy the dip” list, rather than jumping in just yet. Barring a quick market reversal, Slack stock is in a dangerous near-term position.
The decline in Coty (NYSE:COTY) looks alarming at the moment. Shares are cheap, and bulls might see risk as priced in at this point. But COTY itself repeatedly has proven otherwise, and could do so again:
- The technical picture is worrisome. As seemed likely when we covered COTY in early November, shares quickly gave back post-earnings gains. The recent decline means the stock has exited both a triangle pattern and a (modestly) ascending wedge to the downside — both which suggest near-term bearishness. COTY is right on the precipice of a bearish “death cross” as well, in which the 50-day moving average dips below the 200DMA.
- Fundamentally, there is a case for value. COTY yields 4.9%, and in a low interest rate environment investors could see a 5% yield as too attractive to pass up. The company is looking to divest professional beauty brands, which can ameliorate the debt load assumed when Coty made a $12.5 billion deal with Procter & Gamble (NYSE:PG) back in 2015. The combination of debt and underperformance has weighed on COTY stock since then, and a sale could help on both fronts.
- But here, too, there’s the near-term question of just who is stepping in. At this point, Coty is a leveraged turnaround play. That’s a tough case to make in any market, but it’s particularly difficult when investors have a “risk-off” mentality. The near-term chart suggests COTY still has downside ahead. That aside, the long-term chart, which shows a two-thirds decline from 2016, suggests investors should be cautious in trying to time the bottom.
As of this writing, Vince Martin has no positions in any securities mentioned.