The market usually does not like to do what seems the most obvious, but almost everyone is looking for some softness after the big move on the Federal Reserve and the G-20 meeting. The bears expect the rollover to gain traction while the bulls are looking for consolidation as support levels develop.
I’m not sure who will be right, but what we are faced with in the near term is some very dull action. Stocks are drifting down and there isn’t much interest in trying to buy them at this point. Breadth is approaching 2 to 1 negative, but there are more new 12-month highs than lows for a change.
The FAANG names are acting poorly but there is relative strength in some biotechnology names, gold and select small-caps. Financials are the big trouble spot as they react to inversion of the yield curve. Banks borrow money long term and lend it short term, so the inverted yield curve is an issue.
Banks were the no-brainer long trade for market players who believed a hawkish Fed would raise rates steadily next year. That thesis is now in question and that is causing a big issue for banks.
Another sector with problems today is retail. The SPDR S&P Retail ETF (XRT) is trading down around 1.5% in late-morning action. One stock in the group, Dollar General Corp. (DG) , is down about 4% after missing third-quarter earnings-per-share estimates by one cent and reporting in-line revenue. The main problem for Dollar General is that it lowered its guidance for the fiscal year ending in January 2019.
Dollar General is expecting around 10% EPS growth in the fiscal year ending January 2020, which isn’t a great bargain given a trailing price-to-earnings (P/E) multiple of around 20. Besides the challenging valuation, the DG chart is problematic, too. With Dollar General’s softness here on Tuesday, a potential head-and-shoulder top is developing. The stock needs to stay above $103 in order to build some support and possibly turn up in better market conditions.
This is not the time to buy Dollar General. The cut in guidance combined with the poor chart suggest that the risk is to the downside. This is dead money in the near term.
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