A Trade Setup in 2 Depressed Stocks Emerges as Tariff Fears Subside
These stocks related to the housing market could see a short-term pop.
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On Saturday, President Trump signed executive orders authorizing 25% tariffs on goods from Mexico and Canada.
By Monday morning, tariffs on Mexican goods were put on hold, as that country’s government committed to sending 10,000 troops to its border with the U.S. By Monday afternoon, Canada had agreed to a similar deal.
What did Trump want? If you read Trump’s executive order from February 1, its focus is on Mexican drug trafficking organizations. A separate executive order that threatened tariffs on Canadian goods mentions illicit drugs in its title.
The fact that this situation was resolved quickly should come as no surprise. Howard Lutnick, nominated by Trump to lead the Commerce Department, indicated that a solution was within reach prior to the February 1 executive orders.
The panic surrounding the tariff issue was overblown. How did the markets handle it?
The S&P 500 is trading near 6000, right where it was mid-November, mid-December, and mid-January. For the past three months, the large cap index has been trading in a sideways range (shaded yellow).
Like the S&P 500, the Nasdaq 100 is rangebound (shaded yellow).
The strongest of the major indexes right now is the Dow Jones Industrial Average (left chart, below). The venerable index nearly reached a new all-time high last week.
The weakest major index remains the Russell 2000. The small-cap index bounced nicely from its 200-day moving average (green arrow), but is having difficulty surmounting its 50-day moving average (blue).
The Philadelphia Semiconductor Index (left chart, below) and Nvidia NVDA (right chart, below) are both trading below their respective 200-day moving averages (red).
On Monday, Nvidia traded at a four-month low. Nvidia is scheduled to report earnings after the close on February 26.
The homebuilder stocks, represented by the SPDR Homebuilders ETF (XHB, left chart, below) have yet to rebound. Does that mean investors should pile into the homebuilding sector?
Not necessarily. Many stocks in this sector are trading below their key 50-day and 200-day MAs. Homebuilder Lennar Corp. (LEN, right chart below) has been particularly weak, as it reached a 52-week low on Monday.
However, we might be able to flip a depressed stock or two for a trade. I’m looking at two names that aren’t actual homebuilders, but are related to that field.
On Monday, both Home Depot HD (left chart, below) and Masco MAS (right chart, below) gapped lower. Both rebounded to close just above their respective 50-day moving averages (blue).
I’m not buying Home Depot or Masco for a long-term trade. I’m just looking for a quick, short-term pop, in anticipation of a relief rally. If either stock moves against me, I plan to cut losses quickly.
At the time of publication, Ponsi was long HD and MAS.
