Home Depot & Lowe's... Chart Alert vs. Fundamentals (HD, LOW)

Dow component Home Depot, Inc. (NYSE: HD) and Lowe’s Companies Inc. (NYSE: LOW) probably would have been soft today with or without an analyst downgrade.  The housing data is not compelling enough to interest new investors during the summer doldrums.  The good news may be in the Home Depot and Lowe’s stocks charts.

Janney Capital downgraded Home Depot and Lowe’s to Neutral from Buy.  The firm noted that the housing market recovery remains elusive and that the economic recovery is coming slower than expected. Janney even fears that same-store sales figures for Home Depot could dip back into negative territory despite better margins. It also noted that Lowe’s added inventories and added staff expecting a recovery that is less likely in 2010.

We already noted some of the issues from RealtyTrac this morning and unemployment and housing prices are all keeping consumer credit in a way that the housing trends are not there for real recovery.  RealtyTrac’s recent data noted that foreclosures are still above 300,000 per month.  We saw new home starts and new home sales come in weak as well.

As long as the unofficial unemployment rate stays anywhere remotely close to that 17% figure, the 83% of us with real jobs can only stay confident enough to buy a house for so long.  Tax credits for new home purchases are long gone, so the added benefits that were there are also gone.  Unless it comes up as an election ploy, that housing tax credit isn’t coming back.  The reality is that many of those housing sales were seen as being forced, so in a sense it was reverse channel stuffing: sales were being crammed into the system and they were being taken out of future sales that would have naturally occurred in the forward months.

Negative home equity in over 11 million mortgages is also a factor that is a huge harm for Home Depot and Loans.  If consumer credit was brisk and if home values were above water, then it would be a no-brainer that making additions, remodels, and basic improvements would be more useful.  But now the idea of spending money so that your house is just less under water becomes a tough sale.

We did note some good news out there, sort of.  That would be the stock charts.  A review of stockcharts.com shows that Lowe’s has gone well under its 200-day moving average of $23.11 today with shares trading down 1.7% at $21.47.  On the other hand is Home Depot.  The DJIA component is the leader of the sector and the 200-day moving average is $29.72. With shares down 1.7% at $29.98 and having traded briefly under the 200-day moving average today, this is the first such day since November that the 200-day moving average has been challenged.

Home Depot is the leader of the group.  It is a DJIA component and its $50 billion market cap is well above the $30 billion for Lowe’s.  Thomson Reuters has this current year’s sales expectations as being almost $68.7 billion for Home Depot and $49.9+ billion for Lowe’s.

The bad news is going to be the headline reactions seen in the coming weeks and maybe months if things stay static.  The ‘good news’ on this front for Home Depot and Lowe’s is that we are still expected to have an active hurricane season, and whether mortgages are under-water or not those homes have to be repaired from being under water in the literal sense.  Many longer-term investors love buying their favorite big-cap stocks when they are challenging that key long-term 200-day moving average.

JON C. OGG