Chart of the Day – $LL: Lumber Support

by Dan May 29, 2014 3:39 pm • Commentary

It seems that for every day that the SPX makes a new all time high, a new potentially significant divergence emerges.  Gains in the  Housing market, long thought to be a pillar of the recovery, has apparently stalled, or at least the positive momentum in most homebuilders or related stocks, ceding their prior market leadership position long ago.

Despite some mildly better than expected results from TOL yesterday, many suppliers and related retailers remain stuck in the mud.  In early May, famed hedge fund manager Jeff Gundach publicly suggested at an investor conference to short the homebuilder etf (XHB), citing:

Home ownership rates in the United States will likely fall to levels last seen in the 1980s as baby boomers retire and millennials wait longer to form households

At the time there was some in the Twittersphere who jeered at the use of the XHB has it is not a pure-play on actual homebuilders as many of its components are retailers and suppliers like Lumber Liquidators (LL) or Whirlpool (WHR).  Maybe that was exactly his point, that the homebuilding food chain was a better place to focus now, as the actual homebuilder weakness will come later in the cycle.

Regardless, LL is a name that has been on our radar for a while.  Back on February 18th when the stock was a good bit higher at $95, we took a look at LL and concluded:

Without sounding a bit biased, the technical set up looks horrendous.  The one year chart below shows the convergence of the stock’s 50 and 200 day moving averages (purple and yellow lines) and its inability to break through that resistance. While some may see the Dec and Feb lows just below the $90 support level as a near term double bottom, the series of lower highs and lower lows since making all time highs in December could  place a break to $80 in the offing on a miss and guide-down:

LL 1yr chart from Bloomberg

Now, flash forward three and a half months and the SPX is up 80 points, or almost 4.5%, and LL is down about 16% in that time period, flirting with a new closing low for the year and dangerously approaching an exit of the “Triangle of Death”:

LL 18 month chart from Bloomberg
LL 18 month chart from Bloomberg

While we have not been fans of pressing shorts as they sit on long term support, we have preferred to wait for rallies.  In this case we are more inclined to use the relative weakness in some of the XHB components simply as inputs to a trade more in line with Gundlach’s thinking than make too many single stock bets. This is despite the attractiveness of trying to play for the sort of exit below the Triangle of Death that I described in today’s MorningWord on WFM (here).