Home depot: A diamond in the rough?

The overall market is rather bullish at the moment and I'm still positive that it is on its way up towards the year end. However, it has been a bit overbought in the immediate term and today's price action (opened high but closed low) indicates some bearishness. A quick downturn is likely before its shooting significantly higher thereafter. If you want to catch up with the year-end rally, take the opportunity if it indeed comes down within the next few days.

With respect to specific stocks, I think Home Depot (HD) may be a good candidate to move forward. Fundamentally HD has reported a great third-quarter result, beating the analysts' estimates. It also raised its full-year earnings outlook as well as increasing its dividend by 16% to around 3% yield. Recognizing HD's improving financial status, the rating agency, Fitch, upgraded its rating on HD to an A- last week. You may ask, isn't the housing sector in terrible shape right now? Yes, I agree. I don't believe the housing bubble has completed its full course in its downturn. We may still see some price drop in the housing market. Having said that, I would think the housing market is very close to its bottom, if not yet at the bottom. The main customers for HD are the home owners who still need to spend money to maintain their homes including more discretionary items such as kitchen cabinets etc. As the HD CFO, Carol Tome, said: "We see the core repair projects remain strong. We do see some movement in big-ticket items."Given the much down-beaten  expectations for HD in the past 2-3 years, a slight improvement will be great news for it. 

Technically speaking, HD has moved up beyond its 200 day moving average (MA), an indicator often used for a long-term trend. It is actually right at its 5 year peak around $40. If it breaks through this level, it is a strong momentum to move higher. Of course, if the overall market "corrects" in the next few days, HD may also drop. I think it would be a good buy, more so if it drops to its 200 day MA at around $35. This is often its strong support level to launch its next upward movement.

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