Toll Brothers (TOL) has disappointed market participants with its earnings reports over the past 12 months. For example, December’s earnings generated a one-day drop over 7% that finished eliminating a strong gap up in response to November’s preliminary report. However, February’s earnings barely generated a yawn. A week later, the stock resumed an uptrend that has almost gone parabolic in the past week, taking TOL to 8-month highs. This parabolic move has accompanied surging March home sales data and multi-year lows in inventory that followed record low sales in February and precedes the expiration of generous tax breaks.
Parabolic moves are unsustainable. When combined with “exciting news”, parabolic moves usually end badly as buying power exhausts itself in a climactic fury. While the momentum is clearly in TOL’s favor here, I am anticipating more downside potential than upside in the near-term. The risk/reward for a short is relatively good with a tight stop above the recent highs and at least 10% potential downside back to support at the 50-day moving average (DMA) and/or 200DMA. The chart below describes the set-up.
I have long been bearish on TOL given massive insider sales last year. Such sales are typically red flags (like First Solar insiders dumping large quantities of stock around $200 and above) of future troubles for the company and downside for the stock. However TOL has shown no significant signs of weakness as it remains stuck in a 3-year trading range. I cannot speculate on any catalyst to break the trading range to the downside, but I remain wary for now.
The weekly chart below shows that the homebuilder ETF hit 18-month highs today. Its 29% gain for the year far outpaces the S&P 500’s 9% year-to-date gain.
*All charts created using TeleChart:
Be careful out there!
Full disclosure: long TOL puts