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10/8/2018 1:55:17 PM Eastern Time

No Harvest for the Market
By Charles Payne, CEO & Principal Analyst

 Click here to download PDF version

Columbus Day is giving equities a reprieve from the bond market, which is closed for the holiday.  However, concerns regarding rising interest rates are still weighing on investors.  The markets’ first rally attempt this morning failed, as the markets struggled to find direction on a quiet day of trading.  Without the bond market, it’s tough for investors worried about interest rates to gauge the action. 

Equites are drifting around with a downside bias, which may be tough to break out of with the lack of volume.   The good news is buyers have showed up twice.  The bad news is major indices are still lower as tech continues to get hammered and money rotates to the sidelines.

Note: This doesn’t change fundamentals, and the Fed shouldn't be swayed by rates that are still historically low.  I think the stock market is overreacting, but it gives weak hands a chance to sell. 

Markets are coming into strong support zones: 26,180/25,965 for the Dow Jones Industrial Average and 2,858/2,800 for the S&P 500.  Yet, investors are getting spooked and buying puts for protection.  The VIX, known as fear index, has been rising steadily all session long as it breaks above resistance @16.  The VIX will rise when investors buy puts to protect their long positions or to bet on a decline in a stock or stock index/etf.  The VIX is currently trading @17.83, up 20%.  A move below 16 on the VIX would be welcome news for equity bulls, as fear subsides. 

On Wednesday, the U.S. Treasury will be issuing $36 billion in 3-year notes and $23 billion in 10-year notes.  The results of that auction will be closely watched for demand.  The 10-year Treasury note yield is on the cusp of breaking out of a pattern dating back to 2014 when the high yield was 3.0%.  The yield briefly broke above that level in May 2018 (3.0%) when it touched 3.11%, but quickly traded back below that 3% before regaining enough momentum to trade up to 3.24% last week.   

Technology, especially software (-3.4%), is pressuring the Nasdaq lower.  Home construction stocks are attempting to put in a bottom as they retested support from August 2017 and are now trading higher for the day.     

  • The Dow Jones Industrial Index is lower by 170 points, 0.64%, @ 26,277
  • The S&P 500 is lower by 21 points, 0.74%, @ 2,864
  • The Nasdaq is lower by 126 points, 1.62%, @ 7,662
  • The Russell 2000 is lower by 12 points, 0.75%, @ 1,620


  • NYSE decliners 1,794 to advancers of 1,185; new 52-week highs 28 to new lows 283
  • Nasdaq decliners 1,998 to advancers 962: new 52-week highs 20 to new lows 184

Long Idea: Home Depot (HD) @ $196.93
Industry: Consumer Discretionary; Specialty Retail
Click here to view the trading alerts that followed this recommendation

Trading Parameters
Status Closed
Entry Price$196.93
Entry Limitsee comments
Stop LossN/A

Options Trade Parameters
Status Closed
Type Call
Option Symbol HD190118C001
Entry Price $9.60
Strike Price $195.00
Expiration Date 1/18/2019
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BACKGROUND: The Home Depot, Inc. operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, lawn and garden products, and décor products, as well as provide installation, home maintenance, and professional service programs to do-it-yourself and professional customers. The company also offers installation programs that include flooring, cabinets, countertops, water heaters, and sheds; and professional installation in various categories sold through its in-home sales programs, such as roofing, siding, windows, cabinet refacing, furnaces, and central air systems, as well as acts as a contractor to provide installation services to its do-it-for-me customers through third-party installers. In addition, it provides tool and equipment rental services. The company primarily serves home owners; and professional renovators/remodelers, general contractors, handymen, property managers, building service contractors, and specialty tradesmen, such as installers. It also sells its products through online. As of January 28, 2018, the company operated 2,284 stores, including 1,980 in the United States, including the Commonwealth of Puerto Rico, and the territories of the U.S. Virgin Islands and Guam; 182 in Canada; and 122 in Mexico. The Home Depot, Inc. was founded in 1978 and is based in Atlanta, Georgia.

SKINNY: As was mentioned in the Afternoon Note, home construction stocks are attempting to find a bottom at support going back to August 2017. This should bode well for home accessory stocks as well. HD reported second quarter earnings that beat on both the top and bottom lines. Comparable sales rose 8.0%, well above consensus of 6.5%. Customer transactions were higher by 3.1%, while the average ticket price increased 5.0%. The company expects full-year sales growth of 7%. Management has been executing well and we expect the stock to move higher from here. Our price target is $235.

Key Fundamentals
PEG  1.40
Book Value  1.75
Institutional Holdings  70.61
Price/Sales  18.17
Average Daily Volume  3.95M
Shares Outstanding  1.14B
Market Value  225.32B
Insider Activity  10 Buys 5 Sells
52-week High  215.43
52-week Low  160.53
Annual Earnings Estimate  9.56

Analyst Coverage
 Wells Fargo Initiated  OUTPERFORM
 Gabelli & Co Initiated  BUY
 Loop Capital Initiated  HOLD

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