A house divided?

  • Low mortgage rates enough to support housing market?
  • Luxury home-building market lagging overall industry
  • TOL has had difficulty separating from 2019 support level

During a fairly ho-hum market yesterday morning, luxury home builder Toll Brothers (TOL) popped up on a LiveAction scan for stocks with unusual options volume. Minutes into the session TOL options trading was running more than three times its average level:

LiveAction scan, Unusual Options Volume. More than triple average TOL options volume.

Source: Power E*TRADE

Later in the day, it was nearly seven times average. The catalyst? Earnings, which topped estimates handily.1 But “earnings,” experienced traders know, are never just about earnings, they’re about revenues, and future expectations, and other business metrics that may hint at how things are likely to unfold for the company (and stock) in the future.

And that may explain why TOL shares dumped more than -6% in early trading, although they recovered soon afterward:

Toll Brothers (TOL), 7/16/19–8/21/19. Dropped and recovered post-earnings.

Source: Power E*TRADE

TOL beat its headline numbers, but the fine print also revealed it experienced a 3.2% decline in orders,2 a possibly worrisome sign for a home-building sector that has otherwise been strong so far this year: The S&P 500 homebuilder ETF is up around 29% on the year, despite many months of so-so numbers from the housing market.

One of the upsides: Falling interest rates, which can translate into lower mortgage rates, which can help keep a bid under home-builder stocks.

But some analysts think potential bullishness may not be evenly distributed. For example, shares in D.R. Horton (DHI), which focuses more on the “starter home” end of the market, are up more than 40% on the year, while TOL is up just 9%. Also, TOL’s orders in California (a generally high-end market) dropped 36%.3

And although the stock initially rallied strongly off its lows yesterday, it sagged again later in the day, which brought it closer to the key support level it had touched earlier:

Toll Brothers (TOL), 12/31/18–8/21/19. Longer-term ledge.

Source: Power E*TRADE

Chart traders have probably noticed the stock has tested that level (roughly $34.50) more frequently in recent weeks after initially establishing it as a support level in early June.

While support remains support until definitively broken, some traders may think TOL’s inability to pull away from this level increases the likelihood that another test is only a matter of time.

It’s the kind of thing patient traders keep on their radar.

Today’s numbers (all times ET): ECB Minutes (7:30 a.m.), Leading Indicators (10 a.m.), EIA Natural Gas Report (10:30 a.m.), Kansas City Fed Manufacturing Index (11 a.m.).

Today’s earnings include: 58.com (WUBA), Dick's Sporting Goods (DKS), Gap (GPS), HP (HPQ), Intuit (INTU), VMware (VMW), Salesforce.Com (CRM), Ross Stores (ROST).



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1 StreetInsider.com. Toll Brothers Inc. (TOL) Earnings. 8/21/19.

2 Reuters. Toll Brothers profit beat clouded by weakness in orders. 8/20/19.

3 Bloomberg.com. Luxury Homebuilder's Woes Show Mounting U.S. Slowdown Fears. 8/21/19.

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