(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Industrial stocks have had a terrible 2018 with trade-war concerns, causing investors to turn their focus to the high-flying technology stocks. An analysis of the technical chart suggests that stocks like General Electric Co. (GE), Honeywell International Inc. (HON), United Technologies Corp. (UTX), Boeing Co. (BA) and 3M Co. (MMM) may all have even further to fall.
The weak technical charts may also be the reflection of stocks that are facing slower earnings growth in 2019 while trading at valuations that are at or above the one-year forward PE ratio of the S&P 500.
United Technologies' stock has already underperformed the broader S&P 500 in 2018, with shares down by 4.3%, but that may be about to get a lot worse. The stock failed to rise above a critical level of technical resistance at $137.50 and is facing a decline of nearly 9% from its current price around $133 to almost $121, its next level of technical support. The relative strength index (RSI) has reached overbought levels on two occasions and is on the cusp of reversing its upward trend, turning negative, suggesting bullish momentum is leaving the stock. Additionally, the volume levels have been declining, indicating buying interest may be declining.
Shares of 3M are down by more than 14% and are facing an even steeper decline, by as much as 10% more. The stock just finished refilling a technical gap rising to roughly $215. Now the stock is at risk of falling to technical support at $194, 5% below the current price of approximately $202. Should that support level not hold, shares have the potential to fall even further to $182. Typically, after refilling a technical gap, stocks tend to reverse to their previous trend, which in the case of 3M is lower, creating a real risk of falling to $182. (For related reading, see also: 3M Company Reports as a Turnaround Story.)
As if things haven’t been bad enough for GE in 2018, it may still be about to get a whole lot worse. The stock is already 27% lower in 2018 and is facing a decline of nearly 17% from its current price around $12.75. That is because the stock is sitting on a critical level of technical support, and should the stock fall below that support level, shares may decline to roughly $10.60.
With trade war concerns still not settled, while possessing lofty valuations, there is a good chance the recent weakness has further to play out. But it could also make these stocks candidates for big rebounds should the trade-war come to a halt and valuations get to attractive enough levels.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.