You often hear that Wall Street focuses on the future, not the past. It’s a statement we wholeheartedly agree with, and days like Wednesday are a perfect example of why.
If you woke up Wednesday saw that the Advance Gross Domestic Product (GDP) number for the first quarter of 2014 came in at a paltry 0.1% annualized growth rate and thought to yourself, “Well, there goes the bull run on Wall Street,” you were not alone. That GDP number is shockingly low. If it hadn’t been for the expansion in healthcare spending — thanks to the Affordable Care Act (aka “Obamacare”) — GDP growth would have actually been negative for Q1. That’s not something traders usually smile about.
However, we have to remember two things about this report. First, the Advance GDP number is the first of three that we will get for Q1. There are two more opportunities — one in May and one in June — for that number to potentially be revised higher. Second, the GDP number is a backward-looking number, and Wall Street wants to know what is coming six to 12 months down the road.
For this, we turn to the next big news announcement of the day, which was the Federal Open Market Committee monetary policy statement. As it turns out, the FOMC acknowledges the rough patch the U.S. economy went through in Q1, but it doesn’t think it will last.
In fact, it is so confident the U.S. economy doesn’t need any further stimulus that it is going to continue with the gradual tapering of quantitative easing (QE) by cutting the amount of Treasuries and mortgage-backed securities it is buying from $55 billion per month to $45 billion per month.
It’s going to take a lot more than a 0.1% print on GDP to rattle the FOMC — and Wall Street — at this point.
The bottom line is that stock traders on Wall Street took all of Wednesday’s news in stride, and the major indices moved higher for the day. While there are certainly specific industry groups that are struggling right now, stocks in general still seem relatively strong.
This environment gives us a great opportunity to continue to take both bullish and bearish trades.
One sector that stands out as a laggard to us is homebuilding. The most recent National Association of Home Builders Sentiment Survey results were terrible. The NAHB tends to be fairly predictive for long-term direction for home builders, and we have been looking at option prices to find a good value. Surprisingly, the puts on Toll Brothers (TOL) are still relatively cheap, and we like this trade from a technical perspective as well.
The stock recently broke the neckline of a “head and shoulders” pattern and should continue lower in the near term. Long-term support at $30 per share seems to be the most likely target and lines up nicely with the traditional projection based on the head and shoulders pattern itself.
Whether rates go up or the market goes down, we think TOL and other homebuilders are in trouble, and we want to take advantage of that while the market remains so choppy.
Recommendation: Buy to open the TOL June 34 puts for a maximum price of $1.75.
InvestorPlace advisors John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news from Wall Street and beyond. Get in on the next trade and get 1 free month today by clicking here.
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