Apple stock and JPMorgan Chase (JPM) highlight this weekend’s watch list comprising five Dow Jones stocks near buy points. In addition to Apple (AAPL) and JPM stock, the group includes Goldman Sachs (GS), Visa (V) and Home Depot (HD).
As the Dow Jones hit a record high on Friday, Goldman and JPM stock were the two biggest winners among the 30 components, while Visa was slightly above average. Meanwhile, HD and Apple stock both closed lower.
Friday’s stock market action, driven by the strong jobs report and a bounce in the 10-year Treasury yield, could prove to be a turning point for market leadership. Since mid-May, when the 10-year Treasury yield began a 14-week slide from around 1.7% to below 1.2%, Big Tech and growth stocks have led the way. But if Friday’s bounce is the start of a sustained rebound in the 10-year Treasury yield, which seems quite possible, the baton may pass for the next leg of the current stock market rally.
Higher Treasury Yields: Good News For GS, JPM Stock
Falling yields came amid an unexpected Covid wave and a plunge in Treasury issuance, thanks to Federal Reserve asset purchases and a Treasury cash drawdown. While the Covid outlook is uncertain, the upsurge in cases and hospitalizations is leading to more vaccine uptake. Meanwhile, the robust hiring and wage gains seen in Friday’s jobs report may lead the Fed to start tapering asset purchases later this year.
The outlook for solid income gains, boosted by the big infrastructure bill that’s nearing the finish line, could provide more earnings fuel for financial and industrial stocks. The strong economy should provide an uplift for lenders, spurring a demand for more credit after a period of muted borrowing. GS and JPM stock also stand to reap higher net interest margins as the yield curve steepens, widening the gap between short-term rates at which banks borrow and the long-term rates at which they lend.
While those economic tailwinds will benefit all the Dow Jones stocks on this week’s watch list, a higher 10-year Treasury yield could pinch the valuations of growth stocks. For Home Depot, higher Treasury yields will translate to higher mortgage rates, which would add to affordability concerns for homebuyers.
Apple stock’s huge Q2 earnings report had some analysts eyeing targets that would take the iPhone maker to a $3-trillion valuation in coming years. All facets of its business appeared to be rocking. Higher interest rates, if they’re coming, won’t change that, but could be a headwind to higher valuations.
Apple stock dipped 0.6% to 146.14 on Friday, edging up 0.2% for the week. Shares are modestly extended from a 137.17 buy point based on a cup-with-handle base within a larger consolidation.
But a weekly chart shows that Apple stock is within range of a 145.19 entry from a larger consolidation going back to late January.
Since hitting a record 150 on July 15, AAPL stock has been moving sideways in a fairly narrow range. It’s not quite tight enough to qualify as a three-weeks-tight pattern, but investors could use 150.10 as an alternate buy point.
Still, Apple’s relative strength line, the blue line in the charts provided, shows it has only kept pace with the S&P 500 for the past year.
JPM stock, along with Goldman, is part of the Banks-Money Center group that’s ranked a strong 36 out of 197 industry groups, based on stock performance and momentum. Strong investment banking activity has made up for soft credit demand and thin net interest margins.
JPM profit more than doubled to $3.03 per share, excluding a 75-cent gain tied to the release of excess credit reserves, even as revenue slipped 10% from a year ago.
On Friday, JPM stock jumped 2.8% to 157.50 to retake its 50-day moving average, capping a 3.8% weekly advance. JPM stock is about 6% below a 167.54 buy point from a 9-week flat base, according to a MarketSmith analysis. However, aggressive investors could seize on the move past its 50-day as an early entry point.
JPM stock has underperformed the S&P 500 since mid-March, as reflected by its downtrending relative strength line. Still, JPM stock has outperformed 77% of stocks over the past year. It has a solid 82 IBD Composite Rating, a single score combining technical and fundamental factors.
Relative to JPM stock, Goldman Sachs has had another gear. In Q2, EPS rose 71% to $15.02, as revenue grew 9% to $16.7 billion, fueled by investment banking and asset management.
On Friday, GS stock sprinted 3.5% to 397.89, clearing a 393.36 buy point from a flat base in heavy volume. The buy zone runs through 413.93. Goldman Sachs stock jumped 6.1% for the week.
With Friday’s move the RS line for GS stock is now just below May’s multiyear high. GS stock commands an excellent 96 IBD Composite Rating. The biggest stock market winners often have attained a Composite Rating of 95 or higher before launching their big runs.
Visa stock rose 0.5% to 241.40 on Friday. That added to Thursday’s 1.5% advance, which carried V stock clear of its 50-day moving average. The payments giant had tumbled to the 50-day line earlier in the week, and still fell 2% for the week.
Visa stock, which has moved in and out of buy range for the past six weeks, is now back in buy range. V stock has a 237.60 buy point from a seven-week flat base.
V stock peaked at 252.67 as it reported earnings on July 27. The report was a strong one, with EPS up 41% to $1.49 on 27% revenue growth to $6.13 billion.
However, V stock stepped back amid the upsurge in Covid cases, which could dampen international travel, a key driver of profitability. The slow return of cross-border transactions largely explains Visa stock’s lagging performance. Its relative strength line, though moving sideways this year, isn’t far off a multiyear low.
Still, analysts like Visa’s positioning, highlighting the rapid growth of its Visa Direct push-payments platform and its opportunity in cross-border B2B payments.
HD stock was an early pandemic winner as the housing market was among the fastest parts of the economy to revive, then take off. Then, after a consolidation lasting more than 6 months, HD stock went on another suprising run starting in mid-March, peaking at 345.69 on May 10.
After defying the rising rate environment, HD stock consolidated as the falling 10-year Treasury yield brought down mortgage rates. Housing-related stocks like Home Depot have started to look stronger in the past few weeks.
On Thursday, HD stock just cleared a 333.55 cup-with-handle buy point in below-average volume.
However, Friday’s jump in Treasury yields ended the party for now. On Friday, HD stock fell out of a buy zone, slipping 1% to 329.84.
Home Depot is scheduled to report second-quarter earnings before the open on Aug. 17. IBD recommends an options strategy to manage risk heading into earnings.
Even with Thursday’s short-lived breakout, HD stock’s relative strength line has only managed to move sideways over the past couple of months. Over the past year, though, HD stock has been a laggard.
Please follow Jed Graham on Twitter @IBD_JGraham for coverage of financial markets and economic policy.
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