Animal house

●Home Depot (HD) has underperformed SPX during recent downturn

●HD rallied yesterday despite broad market’s continued decline


When a bull market has run a good while, and especially when the first signs of potential rockiness appear, you’ll often hear a lot of talk about “canaries”—the performance of key stocks, or economic indicators, or some other bit of information—that may signal poisonous gasses are wafting through the market coalmine.

As traders and investors buckle up for the final days of what has been a rocky October, looking for canaries is likely a moot point. But what kind of animal would signal the potential end to a downturn? Maybe a frog (you know, jumping…), or perhaps you’d just have to go with the mythological Phoenix rising from the ashes.

Home Depot (HD) and S&P 500 (SPX), 9/10/18–10/24/18. Home Depot (HD) price chart. Bucking yesterday’s weakness

Source: OptionsHouse

It doesn’t really matter. Ultimately, canaries are flighty creatures, and market turning points are almost always obvious only in retrospect. But it’s always interesting to see divergences between individual stocks and the broad market during “high-stress” market conditions. For example, the chart above shows that Home Depot (HD) made a fresh low on Tuesday—just as the S&P 500 (SPX) did—but closed well off its lows and then rallied yesterday while the SPX struggled for much of the day to keep its loss smaller than -1.5%.

A meaningless divergence? Perhaps. The chart also shows that over the past several weeks HD has declined more than the SPX (although the two are pretty much neck and neck since early April). It’s unfair to expect any single stock to buck the trend when the market’s in sell mode, but since sell modes eventually come to an end, it is fair to look for stocks that may be bottoming out sooner than most of their brethren. They may have a little more spring in their step.

In short, if the broad market does stage a rally (or just a temporary bounce), stocks that were getting a head start could be positioned for better-than-average upside follow-through. And HD may have the potential to make up for some of its recent underperformance. Before the roughly 18% drop from its September all-time high, HD had been basking in the glow of its latest successful earnings report (mid-August), which had prompted some analysts to up their price targets to the level HD would reach about a month later.1

Home Depot (HD), 3/15/18–10/24/18. Home Depot (HD) price chart. Downside support.

Source: OptionsHouse

Every stock is still its own animal, though. In the case of HD, the stock has staged its one-and-a-half-day bounce a step above its April lows around $170 (chart above). Some bulls may risk a move down to that level, while the more conservative ones would probably want to see the stock hold above Tuesday’s low of $175.44.

Market Mover Update: Today is the fifth trading day before November, which, for whatever reason, has tended to be a bearish day for the US stock market. Since 1968, the day has closed higher only 64% of the time, and over the past 20 years it’s closed down 13 times for an average return of -0.4%.

Oil rebounded yesterday after Tuesday slip-and-slide, but the December WTI crude oil futures (CLZ8) $5.94 decline from October 17 to October 23 was the market’s biggest five-day dollar decline of the year.

Today’s numbers (at 8:30 a.m. ET unless noted): Durable Goods Orders, International Trade in Goods, Retail Inventories, Wholesale Inventories, Pending Home Sales Index (10 a.m.). Highlighted earnings: Alphabet (GOOG), Amazon (AMZN), (BIDU), Intel (INTC), Twitter (TWTR), GrubHub (GRUB), Merck (MRK), Bristol-Myers (BMY), American Airlines (AAL), Southwest Air (LUV).


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1 Home Depot (HD) PT Raised to $227 at Citi on 2Q Report; 'All-Around Strength...U.S. Macro Environment & Housing Market Remain Supportive'. 8/15/18./