Home Depot, Inc. (NYSE:HD) is beginning to look like it is in the process of making a top. The Federal Reserve raised the discount rate a quarter basis point last week and that may spell trouble for the home improvement retailers. While the discount rate does not impact them directly, it may signal the Federal Reserve is nearing a tightening phase on interest rates. Needless to say this would be extremely bearish for the housing market and translates directly to Home Depot.
Just this morning, Lowe’s Companies, Inc. (NYSE:LOW) released their earnings for the quarter and beat expectations. They reported net earnings of 205 million or earnings per share of $0.14. This is a 27.3% increase in EPS from the same quarter last year. While these numbers are impressive, can they hold up if the Federal Reserve starts tightening later this year?
While the housing market remains at the lows, prices at 50% discounts to their highs back in 2004 – 2007, interest rates have been near zero and 30 year mortgages have hovered around 5%. Even with these cheap rates at which to borrow money, buying in housing has been scarce. In fact, just to entice buyers, the government has offered tax credits of up to $8,000. Yet, prices still remain at dead lows, the housing market continues to suffer.
Ultimately, if the Federal Reserve is forced to raise interest rates because of inflationary pressures, that will pound the housing market into another leg down. With all the hope that housing is beginning to recover, Home Depot stock is at 52 week highs. Last weeks move by the Federal Reserve spells trouble for them later this year and the charts may be confirming.
Note the chart of Home Depot on the daily and weekly time frames. The daily chart clearly shows a double top at $30.50. In addition, note the negative divergences on the MACD line. That is a clear signal that a top is in or near on Home Depot. The weekly chart has also slammed into the 200 moving average. I am alerting here that Home Depot may be in line for a top and pullback in the coming weeks and months. Watch the Federal Reserve, their actions dictate the future for all housing related companies.
I am looking for Home Depot Inc. to top out after the gap higher today off the Lowe’s earnings, based off all these factors. I look for it to pull back over the next few months. Stay tuned to the Research Center for further updates and more analysis and trades.
Related stocks: Toll Brothers, Inc. (NYSE:TOL), KB Home (NYSE:KBH).
Gareth Soloway
Chief Market Strategist
InTheMoneyStocks.com
Weekly Chart
