A Pair Trade in Home Improvement Stocks
With mortgage rates near their all-time lows, and with the work-from-home movement in full swing, the U.S. housing market is heating up right now. Despite a recent pullback, the homebuilding sector is likely to outperform in the near term, as housing activity has a tendency to feed upon itself.
What about the other side of the housing market? Not everyone can afford to upgrade their domicile, especially in the middle of a pandemic. However, many homeowners now have some free time to devote to home improvements.
What are the best and worst names in the home improvement sector? Let's go to the charts to find out.
My favorite chart in this sector right now belongs to Whirlpool Corp. (WHR). This stock has been in a bullish channel since April (diagonal lines), and is currently positioned near the lower barrier of that channel.
Notice how Whirlpool has managed to stay above its 50-day moving average (blue). That moving average closely parallels Whirlpool's bullish trend line.
Compare Whirlpool with Mohawk Industries (MHK), the world's largest flooring company. Mohawk has broken below its 50-day (blue) and 200-day (red) moving averages this week. On Wednesday, the stock formed a bearish candlestick pattern known as an inverted hammer (shaded yellow), an indication that further losses may be ahead.
These two stocks would comprise an interesting pair trade, consisting of a long position in Whirlpool and a short position in Mohawk in equal dollar amounts. No matter which way the market turns next, Whirlpool should outperform Mohawk.
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Ed Ponsi is the managing director of Barchetta Capital Management, and is the author of three books for publisher Wiley Finance. A dynamic public speaker, Ed has made appearances around the world, in such diverse locations as Singapore, Dubai, London, and New York. For more information about Ed and his work, click here