Trading traps and opportunities
04/10/18

The weather across a good portion of the US hasn’t necessarily felt like it, but it is indeed spring—and that’s home buying, homebuilding, and home improvement season.

Most of the US housing data that has come out in the past few months has reflected a stable to strong market, and several housing-related stocks, including builders LGI Homes (LGIH) and Lennar (LEN, see Market Mover Update, below) have done a good job of bouncing back from their February corrections and/or putting up strong earnings numbers.

Even if you haven’t heard of Masco (MAS), you’ve probably heard of one of their many home improvement and building product lines—Delta, Peerless, or Hansgrohe on the plumbing side, Behr (Home Depot’s home brand) or Kilz in paint, and Kraftmaid in cabinets.

The daily chart below doesn’t show it, but even after a roughly 16% correction off its January high, yesterday MAS was trading around $41—more than 600% above its late-2011 low of $5.80.

Masco (MAS) 7/27/17–4/9/18. Bear trap, daily price chart. Reversing a breakdown?

Source: OptionsHouse


What the chart does show is the stock’s recent downside penetration (below the February correction low) of a triangular consolidation pattern and quick rebound off the low day on April 2. Some traders refer to this type of price action as a “bear trap”. Price breaks down below an established support level, which can lead traders to think the market is embarking on a new down move, only to quickly reverse to the upside—“trapping” short-sellers who must cover their positions, fueling upside momentum.

Now, although it’s impossible to determine whether MAS has simply formed the latest in a series of lower highs since January and will soon challenge its recent low, here’s some food for thought:

●The downswing that bottomed on April 2 corresponded to the broader market’s tariff- and tech-driven selling.

● While the stock reversed strongly to the upside only two days after the April 2 low, MAS has since spent five days above that low.

●Masco was flashing on the options radar yesterday, with LiveAction scans showing a strong ratio of calls vs. puts, and call options volume nearly five times the daily average halfway through the trading session:

LiveAction Scan 4/9/18. MAS call options volume

Source: OptionsHouse


Also, Masco has a track record of acquiring complementary businesses, regularly shedding underperforming divisions, and focusing on its core strengths. In recent months the company picked up a new lighting line and Mercury Plastics, which manufactures various plumbing products. Some analysts are enthusiastic about the ability of such acquisitions to feed Masco’s bottom line this year.1

The stock has several nearby upside targets to take a shot at if the bullish momentum continues, but keep an eye on the calendar: Masco is scheduled to release its Q1 earnings on April 24. It’s most recent numbers (February 18) met earnings estimates and topped revenues.

Market Mover Update: In contrast to the bear trap scenario, it’s also true that after breaking out of a trading range, markets often test the breakout level and/or briefly re-enter the range before resuming course. Homebuilder Lennar (LEN), which exploded out of a trading range in spectacular fashion last week on a strong earnings release, pulled back into its prior range and, midway through yesterday’s session, was more than $3 below its post-breakout high of $64.90.

Lennar (LEN) 6/15/17–4/9/18. LEN daily chart. Post-breakout pullback

Source: OptionsHouse


 

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1 Zacks.com. Masco Strong on Acquisitions & Repair/Remodeling Activity. 3/7/18.