Panic Time. Stocks traded lower throughout the session on Wednesday, with all three major indexes closing deeply in the red. The S&P 500 slipped through its previous support level of 2,700 and wiped out 2018’s gains. The Nasdaq Composite officially entered correction territory, down 12% from its high. Concerns over trade, the Fed, new-home sales contributed to the drop. In today’s After the Bell, we…
…look at which sectors have the biggest breadth problem;
…wonder whether buybacks can save the market;
…and marvel at Varian Medical Systems (VAR) stock bucking a down day.
The S&P 500 Is Falling, But Its Components Are Worse Off
About 28% of S&P 500 companies have reported third-quarter earnings so far, with the average growth rate standing at 20%. Although down from the 25% growth rate in the previous two quarters, it’s still the third-best since early 2011. But the market is not reacting well to the overall positives, dropping sharply as the future of semiconductor companies—once the market’s favorites—become worrisome.
The Dow Jones Industrial Average, which is in the red for the year to date, was down 608.01 points, or 2.4%, to 24,583.42 on Wednesday, while the S&P 500 tumbled 84.59 points, or 3.1%, to 2656.10, and the Nasdaq Composite fell 329.14 points, or 4.4%, to 7108.40.
One big concern many investors have is the market’s worsening breadth. Weighted by stock’s market capitalization, the S&P 500 is swayed by trading in the largest companies, which can mask movement among the index’s smaller companies.
While the S&P 500 is 9.4% off its 52-week high, about 79% of its components have fallen more than 10% from their respective 52-week highs, and 47% are in bear markets with losses of 20% or more; 17% have set new 52-week lows.
But things are particularly painful in one sector. According to Jason Goepfert from Sundial Capital Research, half of materials companies have sunk to new 52-week lows as of Tuesday, the worst among all sectors.
The consumer-discretionary sector, where Amazon.com (AMZN) alone accounts for a weighting of over 20%, is a good example how the breadth problem can be hidden behind the glory of a few giants. While the sector itself appears to be the best performer over the past year with 15% growth, only one third of the stocks within that sector have actually reached that threshold. Amazon has gained a whopping 71% in the latest 12 months, but about 28% stocks in the sector are now sinking a new 52-week low.
A resurgence in buybacks could provide a floor for the market. Earnings seasons typically see companies ramping up share-repurchase plans. Brian Reynolds of Canaccord Genuity writes in a Wednesday research report, “If companies announce enough buybacks, that volume may prompt the buyback desks to begin to put money to work.”
Reynolds writes that there is typically a surge in buyback announcements starting at around the 24th of the first month in an earnings season. That day is today.
“If the surge is near the upper end of the recent range, then it becomes more likely that stocks will recover to trend within a month or so,” Reynolds writes. “If the surge is disappointing, then stocks would be more likely to at least retest the recent lows, and it would likely take 3-4 months for stocks to recover to trend.”
Deutsche Bank strategist Parag Thatte estimates that net buybacks will slowly revert to the normal pace of $15 billion a week from next week on.
The Hot Stock
Varian Medical Systems rose to the top of the S&P 500, helped by its fourth-quarter earnings report.
Varian gained $8.07, or 7.7%, to $112.40.
The medical-devices maker earned $1.16 a share on revenue of $801.6 million. Analysts were looking for EPS of $1.20 on revenue of $766.26 million. For the full year, it sees EPS of $4.60 to $4.75 on revenue of $3.06 billion to $3.15 billion. Consensus calls for EPS of $4.76 on revenue of $3 billion.
Barrington Research’s Michael Petusky reiterated an Outperform rating and raised his price target to $132 from $129, writing that “Varian reported a very solid fourth-quarter result.”
Year to date, Varian is up 1.1%.
The Biggest Loser
DXC Technology (DXC) slid to the bottom of the index after a report that the head of its Americas business, Karan Puri, left the company.
DXC lost $14.31, or 16.3%, to $73.25.
DXC issued a statement saying that it had no comment on the rumors, and EPS was trending toward the high end of its guidance range. The company has seen a number of executives leave recently, which made the report of Puri’s reported departure even more troubling. The shares were briefly halted this afternoon.
Evercore ISI’s Rayna Kumar reiterated an Outperform rating and $125 price target on DXC, arguing that regardless of whether or not the report was true, the shares had fallen too sharply.
Year to date, DXC is down 10.8%
Write to Evie Liu at evie.liu@barrons.com
