It is no surprise that market conditions in every sector have changed quickly and dramatically over the past several months. For home builders and specialty home improvement retailers, the sharp decline in share prices along with strong bounces back toward levels of resistance have come on the realization that consumers have been turning their attention to projects around their homes due to the limitations on other sorts of activities.
While a rise in home improvement projects could be a boon to this subsector, the nearby resistance levels showing on the charts discussed below suggest that it may be best for the bulls to proceed with caution.
SPDR S&P Homebuilders ETF (XHB)
Active traders who are interested in niche segments of the market often turn to exchange-traded products. One segment that understandably could get a lot of attention over the weeks ahead is home improvement retail because of the current demand for products. However, as you can see from the chart of the SPDR S&P Homebuilders ETF (XHB), of which home improvement retail comprises nearly 15%, the recent bounce from the March lows has sent the price of the fund toward the resistance of the 50-day moving average.
Followers of technical analysis will notice that the sell-off has also triggered a bearish crossover between the 50-day and 200-day moving averages, which is known as a death cross and is used by many to mark the beginning of a long-term downtrend. Bearish traders will likely watch for a move lower and set stop-loss orders above the 200-day moving average, which is currently trading at $42.04.
The Home Depot, Inc. (HD)
With a weighting of 6.26% of the XHB portfolio, The Home Depot, Inc. (HD) represents the fund's top holding. Taking a look at the chart below, you can see that the sharp drop in March triggered a bearish crossover between the long-term moving averages, similar to what was shown on the chart of XHB.
The current retesting of the 200-day moving average and ascending trendline will likely plan an influential role on the direction of Home Depot stock over the coming weeks or months. At the moment, based on the pattern, bullish traders may want to wait on the sidelines to see if the price is able to regain the uptrend by notching several consecutive closes above the identified resistance.
Masco Corporation (MAS)
Another company that has been benefiting from the surge in interest in home improvement goods such as paint and plumbing products is Masco Corporation (MAS). Taking a look at the chart below, you can see that March's sharp drop in price has also triggered a bearish moving average crossover. Monday's gain has pushed the price of the stock toward the resistance of the 200-day moving average, and the price action over the next week or so will be a telling sign as to what is in store for the coming months.
The Bottom Line
Home improvement companies have seen a rise in demand for goods such as paint and plumbing products over the past couple of months. While the stock prices have experienced a sharp rise in price over the past couple of weeks, they are nearing major resistance levels, which could prevent prices from heading significantly higher from here over the next several weeks.
At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.