Beyond the breakout
04/05/18

There’s a good chance that a lot of the news traders typically factor into their decisions has been shoved to the back of the mental closet lately, thanks to the dual dramas of a market correction and trade-war worries.

For example, have you heard people talking about the housing market recently?

Well, maybe no news is good news. Housing-related stocks have taken their lumps with the rest of the market over the past several weeks, but the fact remains that most of the housing data released last month, including existing home sales, the FHFA housing price index, and the Case-Shiller housing price index, met or outperformed consensus estimates.1

Yesterday—one day after its shares probed the bottom of a two-month trading range—up-market homebuilder Lennar (LEN) unveiled its Q1 numbers: It bested earnings estimates by 44% ($1.11/share vs. $0.77) on revenues of $2.98 billion—15% better than the $2.58 billion estimate.2

Lennar Corporation (LEN) 9/28/17–4/4/18. Daily Lennar (LEN price chart. Earnings breakout

Source: OptionsHouse


In a single bound, the stock leapt from the bottom to the top of the range—more than 10% intraday (see chart above). For traders who weren’t already positioned for this move, it’s time to consider whether the stock may have more upside, or if it’s at least temporarily overbought.

As a general rule, 10% one-day moves are not good things to chase—a near-term pullback has to be considered a possibility even if the longer-term forecast is bullish (check out AAXN over the past couple of days). But after the drywall dust has settled, there may be a few things working in Lennar’s favor:

●LEN’s acquisition of rival CalAtlantic Group in February made it the nation’s largest homebuilder, and in the first quarter of the year, Lennar’s orders (an important indicator of future revenue) jumped 30.4%.3

●Until the February correction, LEN shares had rallied around 78% from the November 2016 low, and the bottom of the trading range was very close to a 50% retracement of that move (see chart below).

Lennar Corporation (LEN) 9/1/16–4/4/18. Daily Lennar (LEN) price chart. 50% retracement

Source: OptionsHouse


No stock is immune to the tide of the broad market—i.e., all bets are off if the major indexes break below their February lows—but LEN’s clearance of its recent range leaves little in the way of technical barriers to its January high around $72.

Tariff tantrums: After hitting pork (and more than a hundred other US exports) with tariffs on Monday, China announced another round of duties on $50 billion worth of US products yesterday, including aircraft, autos, and soybeans. Boeing (BA) shares fell more than 5% intraday, as did July soybean futures (SN8), but both pared their losses significantly before the day was over. Also, hog futures, which tanked on Monday’s tariff news, jumped more than 2.5% yesterday, as did fellow victim Tyson Foods (TSN). The S&P 500 (SPX), which opened down more than 1%, had rallied into positive territory by midday.

It’s still too early to call this a trend, but the increased market resiliency that appears to be meeting each successive tariff announcement brings up an important aspect of the current stare-down: Neither the US nor China has announced implementation dates for the latest rounds of tariffs, which leaves open the possibility of a negotiated solution before they go into effect. Right now, the measures appear to have an element of posturing. At a news conference yesterday in Beijing, for example, China’s Vice Finance Minister noted that before the tariffs are implemented is the “time to negotiate and cooperate.” 4

The issue can’t be taken likely—a negotiated solution is not a foregone conclusion—but for now it appears the most concrete outcome traders can expect is volatility.

 

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1 Briefing.com. Economic Calendar. 4/4/18.

2 StreetInsider. Lennar Corp. (LEN) Tops Q1 Revenue Estimates. 4/4/18.

3 Reuters. Homebuilder Lennar quarterly revenue beats on higher demand. 4/4/18.

CNNMoney. China fires back, announcing tariffs on US planes, cars and soybeans. 4/4/18.