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While there has been a lot of uncertainty swirling around Wall Street during the first half of 2019, one thing that has been crystal clear is that traders want to stock up on longer-term U.S. Treasuries in their portfolios. This strong, consistent move into Treasuries has been pushing Treasury prices higher and, in turn, Treasury yields lower.
For instance, the CBOE Interest Rate 10 Year T Note (INDEXCBOE:TNX) has dropped from a recent high of 3.24% on Nov. 8, 2018, to 2% last week. That’s a huge decline.
While falling Treasury yields may not be good for all companies and stock sectors, they are definitely a bonus for the housing sector and housing-related stocks, like Home Depot (NYSE:HD).
The 30-Year Mortgage Rates are Tied to the TNX
Housing stocks benefit from falling Treasury yields because the 30-year mortgage rate is closely tied to the TNX.
The lower the TNX goes, the lower 30-year mortgage rates tend to go. The lower 30-year mortgage rates go, the more affordable housing becomes, which typically leads to more home purchasing and remodeling.
The more consumers are buying and remodeling homes, the more stuff — paint, carpet, microwaves, garden supplies and so on — they are likely to buy at HD.
The more consumers buy from HD, the more the company is going to earn, and the higher HD stock is likely to go.
Climbing up to $212
You can see all of this playing out on HD’s chart. The stock has been moving higher all year as the TNX and mortgage rates have been dropping, but it has been particularly bullish since the company last reported earnings on May 21.
Daily Chart of Home Depot (HD) — Chart Source: TradingView
After climbing to a recent high of $212, HD has pulled back to retest the former resistance range the stock hit in April to see if it will hold up as a new support level. So far, support around $205 has held.
We expect HD to continue moving higher during the coming weeks. In fact, we wouldn’t be surprised if it climbs back up to challenge its 52-week high of $215.43. Because of the bullish action, we think selling a short-term put write is a good way to trade HD. With support at $205 holding up, we have a good strike price for any options we sell.
If the bullish action continues, traders may even be able to roll this trade out for additional income.
To find out which HD puts we’re selling — and to get access to our full portfolio of income-generating trades — consider signing up for risk-free trial subscription to Strategic Trader today.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.
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