Home Depot face a fork in the road as cracks begin to appear

An overwhelming success story of late, Home Depot has begun to show signs of weakness which begs the question of whether this strong run will continue.

London stock exchange
Source: Bloomberg

The home improvement retailer has enjoyed somewhat of a charmed life following the 2008 recession, rising 360% in the five-and-a-half years from 2009 onwards. However, there are clearly some chinks in its armor, with March to April seeing a circa 10% selloff which highlights potential weaknesses in this story.

The firm specialises in providing building and home improvement materials which is no doubt tied into the strength of the US housing market. As the country has dusted itself off following the subprime crisis, Home Depot has capitalised on the growth of home sales driven largely by low mortgages and an increase in employment nationally.

The problem is that the recent selloff in Home Depot highlights the worries that are beginning to creep in for investors with interest rate hikes seemingly not too far away. This is likely to put the buffers on the housing market, and with higher mortgage rates come increased payments and a reduction in dispensable income.

It is also worth bearing in mind that the recent weakness is in line with the impact that the adverse weather conditions in Q1 will have had upon sales. For that reason, we do expect to see earnings rise when they are released on Tuesday 19 May. Markets are expecting to see earnings per share of $1.15, compared with $0.96 seen this time last year.

Whether we are going to see this long-term trend begin to weaken is not known, yet with the housing market likely to begin weakening once rate hikes hit, along with an economy that has shown signs of slowing somewhat, there is the possibility that it has been in somewhat of a sweet spot up until March.

Technically speaking, the recent move lower has created a new lower low and lower high which is a big warning sign. Alongside that, the price has clearly found resistance upon the 50-day simple moving average (SMA) which has been one of the most consistent providers of support in the past year. Thus I expect to see price continue lower as long as we are below the 50-day SMA with a move down towards the previous swing lows of $105.00 likely.

Home Depot is available for extended hours trading.

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