Lowe's Feeling Downward Pressure Heading Into Summer

Jun. 3.11 | About: Lowe's Companies, (LOW)

Lowe's (NYSE:LOW) broke cleanly below the 200 day moving average Wednesday, which was at $24.16, building on its bearish momentum. The home improvement giant has felt the heat of the housing slump and will continue to feel it into the summer. The company recently reported lower than expected earnings for the first quarter of 2011. In particular, net sales decreased 1.6%, however, management is forecasting a 4% increase in sales over the next quarter.

Strangely, management blamed the lower sales on high gasoline prices, which they say deterred customers from making the trip in, according to a report from the WSJ. Fittingly, management also cited the economic slump as a contributor for homeowners putting off renovations and more expensive home purchases. Following are some observations on this stock's technicals and fundamentals.

The housing recession is here to stay, at least for the duration of the summer. Case-Shiller confirmed Tuesday that there is a housing double-dip. "Prices continue on their downward spiral with no relief in sight,” says David M. Blitzer, chairman of the Index Committee at S&P Indices. Furthermore, the buying pick-ups seen in 2009 and 2010 are mostly accredited to the first-time home buyer tax credits not an actual sustainable demand pick-up.

This does not bode well for Lowe's, as new homes are typically accompanied with painting and other surface renovations at the very least. The housing market problems will continue as long as employment remains stagnant to negative, among other economic factors.

With QE2's planned ending in June, theoretically, the dollar should strengthen while equities will most likely decline because they have been propped up on the artificially low dollar. On one hand, this will be welcomed by American consumers fighting high gas prices and other high commodity prices; on the other hand, equities are used as a form of savings and wealth cultivation by most Americans, so a decline would be negative for most consumers. However, this all would cause little to zero effect on the housing and home improvement market in the short-term (summer months) because it will not destroy or create the amount of wealth that would've been necessary to buy a home or initiate any serious home renovations. So no help arising here for Lowe's.

On an additional note, Lowe's management blamed some of their first quarter sales decrease on rising oil prices. Do they expect oil to become more expensive or cheapen during the Hurricane and driving season? Most experts believe the price of oil will continue to rise through the summer, some have estimated as high as $150 per barrel. The possible increase in the dollar's value will most likely be offset by oil price increases, meaning no real effect on consumers. Plus, the average American will see higher prices at the pump and that alone will be enough to deter them from buying home improvement supplies (according to Lowe's management).

The double dip in housing will continue debt problems for large financial institutions. Due to foreclosure losses, most banks will still be apprehensive to lend, which means it will still be difficult to procure a loan for most potential Lowe's customers.

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Lowe's price performance over last year

On the technical side, over the past three years, LOW's price performance from the beginning of June to the end of July was roughly:

2008: -4.00%

2009: +3.50%

2010: -4.00%

This kind of price action doesn't show us that Lowe's will perform poorly in the summer, but it does rule out the company absolutely being positive. Another price/technical observation is that LOW's price peaked in the beginning of May for '08, '09 and '10 before falling through June and July. The decline has already begun here, but there is still downside room for the price to fall. Additionaly, after the QE1 ended, the price of LOW rose for a short time before falling with the rest of the market.

All in all, I believe Lowe's is in a difficult spot heading into the summer. The economy will seemingly be charging against the company at full speed while at least one major technical level has already been broken (200 day moving average).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.