Another great and insightful article by Tim McGlaughlin, VP Weichert Financial Services.
Things aren’t always as they appear. Despite the appearance of chaos, the financial markets usually follow some intuitive cause and effect relationships. The problem with forecasting: sometimes the market’s effect precedes the fundamental cause, and their isn’t always an obvious cause and effect relationship. Take the housing sector, for example. The industry has recently been hit by a flood of negative news over the past couple of years but it continues to stand firm.
Perhaps the surge in Home Depot Inc.’s stock price to a 2 ½ year high on Wednesday isn’t just a company specific outlier, but is, instead, a hint that the housing sector is gearing for a breakout.
Let’s dissect Home Depot (the third most heavily weighted component of the SPDR S&P Homebuilders exchange traded fund (XHB)). Home Depot has rallied 3.4% in the past two sessions after reporting better than expected fiscal fourth quarter results and raising its dividend. The release of the results isn’t the only cause for the stock’s strength, however, since it has now advanced 12% since the end of January. And contrarians can’t simply attribute those gains to short covering ahead of the results. The number of shares sold short has been declining steadily for the last year and was at a 3 1/2-year low as of the latest reading. Basically, there aren’t enough shorts to create a three week long panic squeeze. The stock’s success is more than just a short term phenomenon. And if you want to get fundamental, same store sales turned positive for the first time in nearly four years, and the dividend was increased for the first time in 3 1/2 years.
So what does that have to do with the housing market? Well, perhaps the stock is trying to tell investors something.
If you analyze this in relative terms, if the housing market is on the upswing, what is one of the most likely components to reap the benefits of the upturn in the front end (or before) the curve? Home Depot would be the classic example ->
builder demand for supplies as the market starts to come back into swing, potential home sellers looking to fix up their homes to put the asset in the best and most presentable position for sale, new buyers who are looking to make that new home “theirs” with all the right touches.
So signs that might be obvious to the savvy investor and to some market makers may not be as obvious to the majority of us, and we sometimes need to peel back the onion to get the answer. As the upswing continues, we can help. Talk to your Weichert Financial Gold Services Manager and Weichert Associate today to get all the answers! –
Tim McLaughlin, VP Weichert Financial Services.