Last week, we were feeling a little cautious, and after yesterday’s pullback, that stance seems justified.
However, the slight pullback doesn’t change the bullish signs we saw in the market on Monday. The markets rose on Monday because of a statement in the Chinese government-controlled China Securities Journal. The front-page editorial said that fostering a “healthy bull market” is more important for the Chinese economy than ever.
The Shanghai Composite stock index jumped up, which spurred a broader rally across indexes in Europe and North America. Clearly, investors received the message that the Chinese government was ready to continue pumping stimulus into the economy.
Although we still have serious reservations about whether government stimulus alone can prop up any economy (or a market) indefinitely, we don’t see any reason not to take advantage of the bullishness China introduced.
One company we still like, even after yesterday’s selling, is Home Depot (NYSE:HD), and now is an excellent time to sell a put write against it.
HD Still Benefits from Lower Rates
The last time we recommended a position on HD, it was because collapsing Treasury yields had allowed homeowners to buy homes or refinance loans for much lower rates.
According to the Mortgage Bankers Association, mortgage applications are up 33% from last year, and its no wonder, mortgage rates hit a new low.
These low rates make it easier for homeowners to pull equity out of their homes to finance remodeling projects. New homeowners can get into their homes and start fixing things up.
That will boost demand for the products and services HD offers.
Support at $235 Will Hold
In the chart below, you can see that HD has gradually been sinking since early June, but it has a strong support level at $235.
Daily Chart of Home Depot (HD) — Chart Source: TradingView
Despite the bullishness on Monday, the stock traded a little flat now while money flow rushed into tech stocks. When the market was up yesterday (before the drop in the afternoon) the mega-cap stocks were still attracting all the attention.
We see HD’s formation as an advantage because it means it is less likely that HD is overbought in the short term.
If investor sentiment remains elevated, the prospects for housing and housing-related stocks (like HD) should be very good, and traders may have another chance to collect on this stock.
We’d recommend selling a put write with a strike based on HD’s support level. To ensure you collect enough income to make it worth the risk, we’d also recommend you pick an expiration in early August.
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.