Dow component Merck & Co., Inc. (MRK) is trading higher by about 1% in Tuesday's pre-market after booking a third quarter 2020 profit of $1.74 per share, $0.31 better than consensus estimates. Revenue rose a modest 1.2% year over year to $12.55 billion, also beating expectations. The pharmaceutical giant topped off the bullish report by raising 2020 guidance more than 10%, but the weak post-news reaction highlights continued investor apathy.

Key Takeaways

  • Merck beat third quarter top- and bottom-line estimates and raised full-year guidance.
  • The modest post-news reaction highlights persistent investor apathy.
  • The 3.07% dividend is more attractive than the mixed price pattern.

Merck has a deep pipeline of cancer, pain management, and HIV treatments but joined the COVID-19 hunt later than its rivals and just started early trials. Merck shares rallied with pandemic-focused stocks mid-year, when the broad sector attracted a strong bid, but have now settled into a bearish pattern that has sliced through support at the 50- and 200-day exponential moving averages (EMAs). The $81.50 level marks the dividing line between bull and bear power in this price structure, or about two points above this morning's opening print.

Wall Street rates Merck as a "Moderate Buy" based upon eight "Buy" and three "Hold" recommendations. No analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $84 to a Street-high $105, while the stock is set to open the session about $4 below the low target. This divergence highlights the current attraction to tech and other growth sectors, rather than old-school pharma plays. Even so, the 3.09% forward dividend yield is keeping current shareholders in place.

A public company's guidance is its report to shareholders on the earnings it expects to achieve in the quarter or fiscal year ahead. Alternatively referred to as earnings guidance or a forward-looking statement, the report typically includes revenue estimates, projected earnings, and capital spending estimates.

Merck Monthly Chart (2000 – 2020)

Chart showing the share price performance of Merck & Co., Inc. (MRK) 

A multi-year uptrend topped out at $96.69 in November 2000, marking a high that wasn't challenged for the next 20 years, ahead of an persistent downtrend that carved three broad selling waves into March 2009's 13-year low in the mid-$20s. A slow-motion recovery completed a round trip into the 2007 swing high in the low $60s in 2014, yielding a quick rally, followed by a failed breakout that reinforced resistance.

A second breakout after the 2016 presidential election suffered the same fate, topping out in the mid-$60s in the first quarter of 2017. The stock posted a two-year low at $52.83 in April 2018, marking the best buying opportunity of the decade, ahead of a steady advance that completed the three-year breakout attempt in the third quarter. The uptrend posted solid returns into December 2019, when it reversed within four points of the 2000 high.

Merck Short-Term Outlook

The stock sold off to a two-year low during the first quarter and bounced in two rally waves, reversing at the .786 Fibonacci selloff retracement level in September. It has now crossed into a monthly stochastic sell cycle, predicting mixed action into the first quarter of 2021. More importantly, accumulation readings have plummeted since posting an all-time high in December 2019, warning that institutions have pulled up stake in favor of other opportunities.

In the shorter term, Merck stock is extremely oversold on a weekly basis, raising the odds for an intermediate bounce that will face a buzz-saw of resistance in the mid- to upper $80s. A buying spike above the September high at $87.80 is needed to improve the longer-term outlook and set up supportive conditions for a test at the 2019 high. Unfortunately, that doesn't seem to be in the cards in the fourth quarter.

Oversold refers to a condition where an asset has traded lower in price and has the potential for a price bounce. An oversold condition can last for a long time, and therefore being oversold doesn't mean a price rally will come soon, or at all. Many technical indicators identify oversold and overbought levels.

The Bottom Line

Merck stock is trading higher after a strong third quarter earnings report, but persistent investor apathy is likely to continue. 

Disclosure: The author held no positions in the aforementioned securities at the time of publication.