What is happening in the housing markets-is the recovery real or will it finally fall in on its own weight of failure?
Recently there was a large bullish options order on Lowe's (LOW). A credit spread trade on the stock occurred. 10,000 October 29 calls at $2.54 were sold and the same number of November 32 calls were bought for $0.72. Looks like October was a closeout and November was a roll up looking for more gain in the stock. So for this particular trader, the sentiment is that Lowe's will continue to move up through November.
The thinking goes like this: Since the U.S. Central bank is keeping rates really low (and has done so since the recession), and now it is taking on an endless mortgage security purchasing program, this is a huge factor affecting the housing market. So for the short term, the housing sector is expected to head higher. According to a poll in the Wall Street Journal, 37% of people who answered the poll believe home prices will advance in the next year. We can debate whether that's a lot or not, but it is twice what it was last year, so some optimism, for better or worse, does seem to be spreading.
Lowe's really was destroyed in the 2008 crisis. Its low point was March of 2009 at $14 but now it is up over 50%. Home Depot (HD) is a major competitor of Lowe's, is also in the same position but it has risen over 75% off its low. How much more can these stocks go?
Lowe's and Home Depot don't necessarily have to rely on a ton of new houses going up every month. While the items they sell do go into new builds, they've also got many products for people who already have a house and are looking to refurbish a room or replace run-down fan parts. So they are in a better place than home builders. But even these stocks are doing well.
The top 4 in the U.S. Market have all seen growth. Look at the growth of these four home builders:
All four of these have gone up 100% or more in the last year and they do not look like they are getting ready to stop yet.
So are housing-related stocks only good for a quick trade? Or is Lowe's, or Home Depot, a smart way to play a sustained recovery in the housing market? I personally like Lowe's to rest a while but then continue to move up.
After building what looks like a double bottom all summer, the stock has been moving up since the beginning of August and has reached a very important peak of resistance. In March of 2012, the stock reached the '32' level only to be pushed back, unable to break through. It is now at that level again seeking a punch through the lines. When it challenged this level it entered oversold territory in the RSI so naturally pulled back. The MACD and the MACD Histogram have given us a negative divergence which stands alone. This also signals a pullback. As I can observe, it looks like the stock will consolidate at this point. I cannot tell yet whether it will continue up or back off but a consolidation is in the stars for Lowe's.
The Options Play
The stock is trading at 31.18 but I believe it may push through this time. For this reason I would play the stock as a bullish income spread.
- Buy the January 2013 call with a strike of '31' (priced at $1.65)
- Sell the January 2013 call with a strike of '32' (priced at $1.15)
- Net Debit to Start: $0.50
- Maximum Profit: $0.50
- Maximum Risk: net debit
Maximum Length of Trade: 4 months
Reasoning behind the Trade
- Stock is bullish
- QE3 will still have an affect on it in a positive way for the short term