Home Depot (HD, $29.33, up $1.26) had another big day Wednesday, rising 4.5% ahead of the August same-stores sales figures due out today. There are different opinions on what Home Depot’s numbers will be or how the market will react so let’s go over a few “educated guesses” in our head and how they may have an affect on our current trade.
Home Depot is dropping hints that home-owners are fixing up their homes more which could lead to a surprise number above Wall Street’s expectations. With home sales still falling harder than a drunken sailor, people seem to be “sprucing” up their homes not necessarily to sell them whenever home prices go up but to stay in them. I still think we haven’t seen the bottom for housing and so it could be another couple of years before we see a noted pickup. Why not make your house more comfortable if you’re gonna be there a while?
The flip side of this coin is that home-owners are buying the cheaper items instead of the big-ticket items. If so, Home Depot could report a number Wall Street doesn’t like which could send the stock lower. How much lower will be key.
The only other possibility of where this trade could be headed is where the stock stands on a technical level. A quick look at the chart shows a strong resistance at $30 which could mean one of two things. Either we break through $30 and our calls go higher OR the stock hits resistance and heads back down.
The January 2010 25 calls (WHDAE, $7.35, up $0.65) were mentioned at $5 on August 19. At the time, the reason we were going long the 2010 January call options is because we were trying to get in as Wall Street kept punishing the stock. But we needed to give ourselves plenty of time for Wall Street to notice just how beaten down this stock really was before the action started coming back in.
If you’ll recall, back in May, Home Depot reported a whopping 67% drop in profits and I wrote about the mood of the market back then and we knew earnings estimates were going to be lowered. In August, just three months later, Home Depot beat Wall Street’s estimates but the stock closed lower for the day. This time around Home Depot reported a 24% drop in profits. The market always takes a stock to an extreme high or an extreme low based on valuations by analysts. By looking at just these two numbers, the smart investors saw an “improvement” in the quarter to quarter numbers and started buying Home Depot again. And here we are knock, knock, knocking on $30’s door.
I know I went deep on the analysis this morning but the simple fact is this is another easy one to figure out. Many of you have a 50% profit. If you sell now, then you don’t have to worry where the stock goes. If the stock goes higher, you miss some more profits, if the stock trades lower, then you saved some profits. As Steve Miller would say, “go on take the money and run”.
Rick Rouse
Rick@OptionsMentoring.com
