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  • Stocks rallied today despite a discouraging inflation report.
  • Energy and infrastructure spending supports a global engineering company.
  • Slowing commercial construction and manufacturing activity suggests selling this big-cap supplier.

The markets reminded us today that stocks don’t rise or fall in a straight line. Often, you’ll see substantial pullbacks or rallies in primary bull and bear market trends, respectively. Today, we saw the latter because investors were tilted aggressively bearish ahead of today’s hotter-than-expected Consumer Price Index report.

In September, core CPI, or inflation ex-energy and food prices, rose 6.6% in the past year. Because that was the largest year-over-year increase since August 1982, the S&P 500 ETF (SPY) initially sold off, falling to about $348. However, investors who had shorted stocks in expectation of a poor number used the drop to book gains, causing a sharp rally that lifted the SPY over 5% from its intraday low. 

The reversal was impressive, but it remains to be seen if institutional investors will follow through with additional buying, given what’s likely to be a more aggressively hawkish Fed.

Will institutions and Main Street investors use strength at downtrending moving averages as an opportunity to reduce exposure? Or will this rally be more long-lasting? We’ll only know that in hindsight, so, for now, it may be best to focus on individual stocks. 

Rising energy demand fuels spending

There’s good reason to believe that revenue holds up better for energy and infrastructure engineering and construction company Flour  (FLR)  than stocks in other industries. 

Flour gets a significant share of its revenue from contracts associated with building and maintaining energy infrastructure, including legacy fossil fuel and renewable energy projects, including nuclear programs. That exposure provides a tailwind to the company’s backlog of deals because countries are increasingly interested in ensuring energy independence and private companies are flush with cash because of high fossil fuel prices that can be used to boost production, storage, and transportation.

In Q2, its energy solutions business contributed $1.3 billion of its $3.3 billion in total revenue and $65 million of its $108 million consolidated profit. This segment won contracts worth $1.3 billion in the quarter, up from $661 million year over year, leaving its backlog at a healthy $8.4 billion. New contracts included a lithium project, a refinery upgrade, and a Gulf Coast liquified natural gas project to give you a sense of what's driving this business.

Flour may also benefit from exposure to rising U.S. spending associated with last year’s infrastructure bill. Its urban solutions business, which had revenue of $1 billion last quarter, secured $1.9 billion in new projects last quarter, up from $617 million year over year, including a highway deal in Texas. That segment’s backlog is $7.7 billion. Because spending from the infrastructure bill on roads and other projects should accelerate next year, Flour could enjoy a nice tailwind.

Of course, Flour isn’t immune to slowing global growth. Last quarter, revenue and EPS fell 10% and 59% to $3.3 billion and $0.13, respectively. Yet, management’s guiding for EPS of at least $1.15 this year, and analysts currently estimate EPS will improve to $1.54 next year. If those estimates hang tough, investors are paying 18 times forward earnings to own shares. That's arguably pretty cheap, given its 5-year P/E low is 17.

Revenue tailwinds and valuation aren’t the only reasons to buy shares, though. Real Money's technical expert Bruce Kamich thinks its charts are compelling, too.

In “Fluor Looks Impressive as It Bucks the Market Flow,” Kamich writes, “In this weekly Japanese candlestick chart of FLR, below, we can see an impressive rally the past two years plus. FLR is trading above the rising 40-week moving average line. The weekly OBV line shows us a more positive-looking picture than the daily chart. The MACD oscillator is bullish. A weekly close above $30 should refresh the uptrend.”

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The on-balance volume (OBV) is a running total of up minus down day volume. Moving average convergence/divergence (MACD) is a momentum tool. It’s calculated by subtracting the 26-day Exponential Moving Average (EMA) from the 12-day EMA. A bullish or bearish signal triggers when that result crosses over or below zero, or the 9-day EMA.

What’s Kamich’s upside target? Kamich writes, “In this weekly Point and Figure chart of FLR, below, we used a five-box reversal filter. Here the chart suggests that the $39 area could be seen in the weeks ahead.”

Overall, he concludes that “The longer-term uptrend in FLR is impressive. Traders could go long at current levels and risk to $25 or go long on strength above $30. Our initial price target is $39.”

Falling construction and manufacturing activity is a headwind

It could get a little quieter at Fastenal locations in the coming months. The purveyor of fasteners used to build everything from commercial properties to manufactured items enjoyed significant revenue growth thanks to expanding economic activity because of COVID-era stimulus and record low-interest rates.

Those heady times are over, though. The Fed’s plan to break the back of inflation has caused lending rates to soar, denting demand for construction projects, and GDP to slow, negatively impacting manufacturing activity, and further hamstringing demand for Fastenal’s products. As a result, Fastenal may have a tough time putting up strong revenue and profit growth, particularly given tough-to-beat year-over-year comparisons.

In July, management said demand was softening and that inventory had increased because of a ramp-up to meet anticipated demand.

Today, Fastenal released third-quarter revenue and earnings that were better than analysts expected, but gross margin fell, and inventories remained high. In the quarter, construction sales, which account for 11% of sales, grew just 1.4% in September from one year ago, versus 11.7% year-over-year growth in the same quarter last year. Manufacturing sales offset that weakness, so total sales were up 16% from last year, however, that was down from 18% in Q2.

In “Fastenal Beats on Earnings But The Charts Remain Weak,” Kamich is unimpressed by what he sees in the company’s charts. He writes:

“In this weekly Japanese candlestick chart of FAST, below, we can see that prices have been in a downward trend since late 2021. The slope of the 40-week moving average line is negative. The weekly OBV line is in a similar decline as traders have been more aggressive sellers than buyers. The MACD oscillator is bearish.”

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Using a point-and-figure chart, Kamich maps out risk to $38 to $39, concluding, “Despite an earnings beat, FAST is pointed lower. Traders should avoid the long side of FAST for now.”

The Smart Play

The stock market rally today was powerful enough to lift the S&P 500 back toward technical resistance at its 21-day moving average. It may have enough energy to march through it, but it will still have to deal with trapped sellers (overhead resistance) above, who may use a declining 50-DMA and 200-DMA as an exit point.

Bear market rallies can be short, like in early September, or long, like in June. However, the volatility associated with these rallies makes gaming them difficult, so remaining cautiously optimistic while playing defense is smart.

For example, consider buying strong-acting stocks on down days and selling weak stocks on up days, and then protecting capital by using stop losses.

If you’re interested in adding Flour to your portfolio, consider buying a starter position and then adding to it on down days as long as it remains above its 200-DMA. Also, to protect your capital, consider placing a stop loss below the 200-DMA or beneath its September lows if you want to give it more room.

Fastenal’s post-earnings rally today was supported by the market’s oversold bounce, but it’s currently challenging its 21-DMA. As a result, consider selling some here and then waiting to see if it fails to hold its 21-DMA or builds. If it fails, sell the rest; if it rallies, consider selling more at the 50-DMA and, if it keeps running, the 200-DMA.

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