Home Depot (NYSE:HD) is in a bit of trouble right now. HD stock has pulled back sharply from recent highs, and the retreat looks more like a longer selloff than a bout of profit taking. It’s time to turn bearish on HD stock.
When I last looked at Home Depot back in May, the company was preparing to release its latest quarterly earnings report. Riding the highest level of new home sales in 11 years, Home Depot posted impressive results.
Now, however, the growing global trade war is beginning to take its toll on HD stock. Import tariffs on steel and aluminum, as well as Chinese import tariffs on goods will hurt HD’s bottom line. There’s no way around it.
Furthermore, there’s a reason why new home sales spiked in the first half of 2018 — rising interest rates. Home buyers were rushing to get in ahead of rising mortgage rates, which remain just shy of seven year highs. Analysts are predicting a 30-year fixed mortgage rate of nearly 5% by the end of 2018.
These headwinds do not bode well for HD stock. And they are part of the reason why HD shares have fallen nearly 3.5% in the past two weeks. The stock is now hovering just above support near $195. If $195 fails to hold, it’s a quick trip to $190 and HD stock’s 50-day moving average.
Sentiment is also in danger of pulling back for HD amid the current trade-war situation and rising interest rates. According to Thomson/First Call, 24 of the 33 analysts following HD stock rate the shares a “buy” or better. The 12-month price target rests at about $211. Should any of these bulls reassess their outlooks based on current geopolitical turmoil, it could provide additional selling pressure for HD stock.
Checking in with HD’s options backdrop, we find an expected degree of pessimism. Currently, the July put/call OI ratio comes in at 0.87, with puts on the verge of parity with calls. In short, speculative traders are already calling for a reversal in HD’s uptrend.
Finally, July implieds are pricing in a nearly 4% move for HD stock heading into expiration. This places the upper bound at $202 and the lower bound near $187.
2 Trades for HD Stock
Bear Put Spread: Traders looking to capitalize on a continued retreat in HD stock might consider a July $185/$190 bear put spread. At last check, this spread was offered at 68 cents, or $68 per pair of contracts. Breakeven lies at $189.32, while a maximum profit of $4.32, or $432 per pair of contracts is possible if HD stock closes at or below $185 when July options expire.
Bull Call Spread: On the other hand, this market has been far from rational. HD stock could very well rebound from support near $195 and head higher through July, driven by the last vestiges of buyers in the housing market. Those traders looking to bet on a rebound might want to consider a July $200/$202.50 bull call spread. At last check, this spread was offered at 71 cents, or $71 per pair of contracts. Breakeven lies at $200.71, while a maximum profit of $1.79, or $179 per pair of contracts is possible if HD stock closes at or above $202.50 when July options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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