Relative strength, three ways

It was an event that has repeated itself many times over the past several weeks.

Despite popping to an all-time intraday high of $81.88 after releasing positive quarterly numbers on May 8, homebuilder LGI Homes (LGIH) closed sharply lower ($69.91) and subsequently dropped another 17% over the next five days, closing at $58.19 on May 15. After testing that low and closing above it on May 22, LGIH swung higher—including yesterday, when the stock gained more than 2% intraday as the broader market was suffering its worst day in a month.

Also, options traders were busy in LGIH on the bullish side, pushing its call-to-put ratio close to 40 in the early part of yesterday’s session:

LiveAction scan, LGIH. High call/put ratio.

Source: OptionsHouse

So why the retreat from highs, and why the current bounce? It’s no secret that lots of companies that have posted strong earnings have gotten creamed in the Q1 reporting season: Data showed that companies that beat first-quarter earnings estimates dropped an average of 0.3% from two days before the release to two days after. That may sound insignificant, but consider the five-year average price change during that period for companies that beat forecasts is +1.1%.1

LGI Homes crushed the forecasts on May 8, by the way, beating earnings by 29% and revenues by more than 8%—the latest in an unbroken string of dual outperformances dating back to Q2 2016.2 So perhaps its post-earnings nosedive was part of a larger phenomenon having to do with investor fear over most of the tax-reform “good news” being priced into the market, and continued jitters over geopolitical uncertainty.

LGI Homes (LGIH) vs. S&P 500 SPX), 5/21/18 – 5/29/18. LGIH 60-minute price chart

Source: OptionsHouse

The stock’s recent upswing, on the other hand, is interesting because it has unfolded just as the broad market lost its bullish momentum (see 60-minute chart comparing LGIH and the S&P 500, above), and also because of the level at which it occurred. The most recent swing low bottomed in the general support zone of the February and March lows, which were also launching pads for up moves, as shown in the following daily chart:
LGI Homes (LGIH), 9/22/17 – 5/29/18. LGIH daily price chart. Support zone

Source: OptionsHouse

Whether LGIH can build on this foundation of support and stage another rally will likely depend on the tenor of the broad market—it would probably be unrealistic to expect any single stock to withstand a sharp and sustained downturn in global equities—and the quality of US housing market data (the next available number, pending home sales, is due on Thursday).

But for now, LGIH appears to be behaving bullishly when it is still trading at a significant discount from its levels of just a couple of weeks ago.

Market Mover Update: The S&P 500 (SPX) broke out of its narrow range to start the week, dropping more than 1% (in line with a global equity sell-off) amid worries of instability in the European Union (EU) driven by the Italian governmental crisis, as well as emerging-market woes. Although US Treasuries and the dollar rallied strongly, gold declined modestly.

Micron Technology (MU) followed up on last week’s 15% jump with a 4.3% intraday rally yesterday that took the stock to a nearly 18-year high of $63.98. Crude oil futures kept sliding yesterday after falling 8.8% from last week’s high. Chinese search engine Baidu (BIDU) continued to hold above last Monday’s sell-off low.


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1 The stock market is punishing companies that beat earnings forecasts—here’s what history says. 5/10/18

2 LGI Homes (LGIH) Earnings. 5/29/18.