U.S. stocks face a crucial test this week. Earnings season peaks with reports from market leaders like Apple (NASDAQ:AAPL), Facebook (NASDAQ:FB), and Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL). U.S. corporations need to deliver good news this week, as external pressures like the trade war and Brexit remain frustratingly unresolved.
Despite those external pressures, stocks have managed to grind higher. The S&P 500 in fact set an all-time closing high on Friday. Intraday highs, however, remained modestly — less than a point — below the record set on July 26.
That date is important in the context of trading this week. That session came at the peak of earnings season, which disappointed. The S&P 500 would drop 6% in the next six sessions.
The worry is that history will repeat itself. Whether it does likely comes down to the strength — or weakness — in earnings reports this week. And that strength in turn must come from the U.S. consumer, which has carried the economy in recent years, and particularly in the last few quarters.
Monday’s three big stock charts focus on consumer stocks that already have reported. And all three of these charts highlight some potential worry for consumer issues, and thus the market as a whole. To be sure, these companies are a long ways from the likes of Apple and Google. Still, the charts, and the fundamentals, do raise a question as to whether these all-time highs for the market will hold.
Coca-Cola (NYSE:KO) stock finally managed to break out this year. KO stock had underperformed the market for much of the decade, gaining 30% total over seven years at February levels. From those lows, however, the stock has gained an impressive 21%.
But the first of our three big stock charts highlights potential technical weakness, which adds to the fundamental questions at play for both Coca-Cola stock and the market as a whole:
- It certainly seems like there’s a reversal occurring in KO stock at the moment. Admittedly, the pullback hasn’t been severe: shares are down less than 4% from the highs. But KO has been drifting in the wrong direction, and the initially positive reaction to Q3 earnings hasn’t held. In that context, Friday’s decline looks particularly concerning. It sent KO stock through both its 20-day and 50-day moving averages, a move which often portends more downside ahead.
- Fundamentally, there are concerns as well. Coca-Cola has been undergoing a massive transformation over the past few years, “refranchising” its bottling operations in a bid to improve margins. But it has done little for earnings, which on an adjusted basis have shown essentially zero growth for years now.
- So far, the market has remained patient: KO stock trades at a whopping 25.5x 2019 consensus EPS. That’s a historically high forward multiple for Coca-Cola stock. On that front, KO isn’t alone. Investors have done the same for companies like Procter & Gamble (NYSE:PG) and until recently McDonald’s (NYSE:MCD). The weak chart suggests that investors might stop paying mid-20s earnings multiples for little growth. That would be a problem for stocks beyond KO.
L Brands (LB)
The multi-year sell-off in L Brands (NYSE:LB) isn’t a sign of weakness in the U.S. consumer. Consumers are spending; they’re simply not spending at L Brands unit Victoria’s Secret, in particular. Mall traffic continues to decline, while rival aerie, owned by American Eagle Outfitters (NYSE:AEO), continues to take market share.
Despite those pressures, as the second of our big stock charts shows, investors are stepping in at the moment. The question is if this bottom will hold. And there are reasons to believe that it won’t:
- The good news at the moment is that a usually-bullish double bottom has formed at $16. But quickly declining moving averages also are providing resistance at the moment. LB stock probably has to break out above those moving averages to gain momentum heading into earnings next month, which makes trading on Monday, and this week, quite important from a technical standpoint.
Click to EnlargeTo be fair, LB may be able to do so. But from a long-term standpoint, the stock quite obviously is headed in the wrong direction. Bottoms have formed on multiple occasions since late 2015 highs. All of them have given way. Levels at the beginning of September represented the lowest trading for LB in nearly ten years.
- Fundamentally, LB stock does look cheap. It trades at 7.4x FY19 (ending January 2020) consensus earnings per share estimates. A 6.7% dividend yield might entice some investors as well. But most mall retailers are cheap, and chasing yields in the sector has proven to be dangerous. Technically and fundamentally, there’s a case that LB’s recent trading represents a “dead cat bounce,” and not a long-awaited reversal.
General Mills (GIS)
Unlike LB stock, General Mills (NYSE:GIS) shares haven’t found a bottom yet. The question is when that bottom will arrive:
- From the chart, it’s tough to tell. Support isn’t obvious. GIS stock has dipped below all of its moving averages, including the 200-day. This looks like a downtrend that can continue.
- That said, there is a case for a near-term bottom. Investors did step in quickly after sell-offs pushed the stock below $50 in May and June. There’s one possible reason why: at $49, General Mills’ dividend yield reaches 4%. And as we noted relative to Cisco Systems (NASDAQ:CSCO) last week, attractive round-number dividend yields often have provided support in this low interest rate environment.
- And there is a modest potential catalyst for GIS stock. Rival Kellogg (NYSE:K) reports earnings on Tuesday. Both companies are trying to pivot away from the pressured cereal space (a key reason why General Mills acquired Blue Buffalo last year) but in the meantime the category is providing a drag on growth.
- There’s a case for GIS to rally this week, if Kellogg can drive some optimism. A yield close to or at 4% and a reasonable earnings multiple may prove too tempting. That said, if Kellogg disappoints, the pressure may continue — and the dividend alone may not be enough to reverse it.
As of this writing, Vince Martin has no positions in any securities mentioned.